Exhibit 99.4
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NOTE AND WARRANT PURCHASE AND SECURITY AGREEMENT
By and Among
AVALON DIGITAL MARKETING SYSTEMS, INC.
and
AVALON ACQUISITION COMPANY, LLC
and
NETWORKS DIRECT, INC.
Dated as of May 28, 2004
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................................................1
Section 1.1. Definitions.......................................................................1
Section 1.2. Other Definitions.................................................................9
ARTICLE II PURCHASE AND SALE OF THE SECURITIES.......................................................11
Section 2.1. Issuance and Sale of Notes and Warrants at First Closing.........................11
Section 2.2. Issuance and Sale of Notes and Warrants at Second Closing........................11
ARTICLE III THE CLOSING...............................................................................12
Section 3.1. The First Closing................................................................12
Section 3.2. First Closing Deliveries.........................................................12
Section 3.3. The Second Closing...............................................................12
Section 3.4. Second Closing Deliveries........................................................12
ARTICLE IV REPRESENTATIONS AND WARRANTiES OF the COMPANY.............................................13
Section 4.1. Organization. Subsidiaries.......................................................13
Section 4.2. Due Authorization................................................................13
Section 4.3. Capitalization...................................................................14
Section 4.4. Consents and Approvals...........................................................15
Section 4.5. No Violations....................................................................15
Section 4.6. Compliance with Laws.............................................................15
Section 4.7. Financial Advisory Fees..........................................................15
Section 4.8. SEC Documents; Forecasts.........................................................16
Section 4.9. Taxes............................................................................16
Section 4.10. Contracts........................................................................18
Section 4.11. Litigation.......................................................................19
Section 4.12. Intellectual Property Assets.....................................................19
Section 4.13. Employee Matters.................................................................21
Section 4.14. Licenses and Permits.............................................................21
Section 4.15. Financial Statements and Other Information.......................................22
Section 4.16. No Undisclosed Liabilities.......................................................22
Section 4.17. Employee Plans...................................................................23
Section 4.18. Insurance Policies...............................................................24
Section 4.19. No Illegal or Improper Transactions..............................................25
Section 4.20. Bank Accounts....................................................................25
Section 4.21. Environmental and Safety Requirements............................................25
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..........................................25
Section 5.1. Organization.....................................................................26
Section 5.2. Due Authorization................................................................26
Section 5.3. Financial Advisory Fees..........................................................26
Section 5.4. Investment Representations.......................................................26
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TABLE OF CONTENTS
(continued)
Page
ARTICLE VI COVENANTS.................................................................................27
Section 6.1. Conduct of Business Pending the Closing..........................................27
Section 6.2. No Solicitation of Alternative Proposals.........................................28
Section 6.3. Cooperation; Access to Information...............................................30
Section 6.4. Further Actions: Reasonable Efforts..............................................31
Section 6.5. Use of Proceeds..................................................................31
Section 6.6. Restructuring; Bankruptcy Court Approval.........................................31
Section 6.7. Registration Rights Agreement....................................................32
Section 6.8. Compliance with Securities Law...................................................32
Section 6.9. Corporate Governance.............................................................32
Section 6.10. Releases.........................................................................32
Section 6.11. Purchaser Preemptive Rights......................................................33
Section 6.12. Notification of Certain Matters..................................................33
Section 6.13. Management Options/New Capitalization............................................33
Section 6.14. Affirmative Covenants............................................................33
Section 6.15. Required Approvals...............................................................34
Section 6.16. Audited 2003 Financial Statements................................................36
ARTICLE VII CONDITIONS................................................................................36
Section 7.1. Conditions to the Purchaser's Obligations........................................36
Section 7.2. Conditions to the Obligations of the Company.....................................37
ARTICLE VIII TERMINATION...............................................................................38
Section 8.1. Termination......................................................................38
Section 8.2. Break-up Fee and Expense Reimbursement Fee.......................................39
ARTICLE IX SECURITY..................................................................................39
Section 9.1. Security Interest................................................................39
Section 9.2. Covenants and Representations Concerning Collateral..............................40
ARTICLE X Event of Default..........................................................................43
Section 10.1. Event of Default.................................................................43
ARTICLE XI RIGHTS AND REMEDIES.......................................................................44
Section 11.1. Rights and Remedies of the Purchaser.............................................44
Section 11.2. Disposition of Collateral........................................................46
Section 11.3. Costs and Expenses...............................................................46
Section 11.4. Applications of Collateral.......................................................47
ARTICLE XII MISCELLANEOUS.............................................................................47
Section 12.1. Governing Law....................................................................47
Section 12.2. Jurisdiction; Forum; Service of Process; Waiver of Jury Trial....................47
Section 12.3. Successors and Assigns...........................................................48
Section 12.4. Entire Agreement; Amendment......................................................48
Section 12.5. Notices..........................................................................48
Section 12.6. Delays or Omissions..............................................................49
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TABLE OF CONTENTS
(continued)
Page
Section 12.7. Further Assurances...............................................................49
Section 12.8. Counterparts.....................................................................50
Section 12.9. Severability.....................................................................50
Section 12.10. Headings.........................................................................50
Section 12.11. No Public Announcement...........................................................50
Section 12.12. Purchasers' Agent................................................................50
Section 12.13. Exculpation Among Purchasers.....................................................51
iii
Exhibits:
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A Form of 3% Senior Convertible Secured Note
B Form of Plan of Reorganization
C Form of Warrant
D-1 Schedule of Note Purchases at First Closing
D-2 Schedule of Note Purchases at Second Closing
E-1 Schedule of Warrant Issuance at First Closing
E-2 Schedule of Warrant Issuance at Second Closing
F Risk Factors Associated with Investing in the Reorganized Company
G Form of Registration Rights Agreement
H Certificate of Incorporation of the Reorganized Company
I Bylaws of the Reorganized Company
J Assumed Executory Contracts
NOTE AND WARRANT PURCHASE AND SECURITY AGREEMENT
THIS NOTE AND WARRANT PURCHASE AND SECURITY AGREEMENT (as it may be
amended, restated, supplemented or otherwise modified from time to time, this
"Agreement") is made as of May 28, 2004 by and between Avalon Digital Marketing
Systems, Inc., a Delaware corporation, in its capacity as debtor and
debtor-in-possession (the "Company"), and Avalon Acquisition Company, LLC and
Networks Direct, Inc. (collectively, the "Purchasers," and individually, a
"Purchaser").
RECITALS
WHEREAS, on September 5, 2003 (the "Petition Date") the Company filed a
voluntary petition for reorganization relief under Chapter 11 of Title 11 of the
United States Code, 11 U.S.C. ▇▇.▇▇. 101 et seq., as amended (the "Bankruptcy
Code") in case No. 03-35180 (the "Chapter 11 Case") pending in the United States
Bankruptcy Court for the District of Utah (the "Bankruptcy Court");
WHEREAS, the Company desires to undertake the Restructuring (as
hereinafter defined);
WHEREAS, in connection with the Restructuring, the Purchasers desire to
invest in the Reorganized Company (as hereinafter defined);
WHEREAS, to implement such investment, the Purchasers desire to
purchase from the Reorganized Company, and the Reorganized Company desires to
issue and sell to the Purchasers, upon the terms and subject to the conditions
set forth herein, the Securities (as hereinafter defined); and
WHEREAS, with respect to the sale and purchase of the Securities, the
Purchasers will have the benefit of the registration rights provided for in a
Registration Rights Agreement (as hereinafter defined).
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. For the purposes of this Agreement, the
following terms shall have the following meanings:
"Affiliate" shall have the meaning ascribed thereto in Rule 12b-2
promulgated under the Exchange Act.
1
"Alternative Proposal" shall mean any proposed or actual tender offer,
merger, consolidation or other business combination involving the Company, or
sale, lease or other disposition, directly or indirectly, by merger,
consolidation, share exchange or otherwise, of any material assets of the
Company or the Subsidiaries or any securities of the Company or the
Subsidiaries, or any transaction which is similar in form, substance or purpose
to any of the foregoing transactions; provided, however, that the term
"Alternative Proposal" shall not include the transactions contemplated hereby.
"Board of Directors" shall mean the Board of Directors of the Company
(or the Reorganized Company, as the case may be).
"Borrower" shall mean the Reorganized Company.
"Business Day" shall mean any day excluding Saturday, Sunday, or any
other day on which banking institutions located in Provo, Utah or New York, New
York are required or authorized to be closed.
"Claim" or "Claims" shall have the meaning set forth in Section 101(5)
of the Bankruptcy Code, including, without limitation, any right to receive
payment from the Company, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, contested,
uncontested, legal, equitable, secured, or unsecured; or any right to an
equitable remedy for breach of performance if such breach gives rise to a right
to receive payment from the Company, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent, matured, unmatured, contested,
uncontested, secured, or unsecured.
"Closing" shall mean each of the First Closing and the Second Closing.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral" shall mean all of the personal property of Borrower,
wherever located, and now owned or hereafter acquired, including, without
limitation: (a) all Receivables, Inventory and Equipment and, in addition, all
other property of Borrower in which the Purchasers have, or may in the future
acquire or be granted, a Lien hereunder or under any of the other Transaction
Documents; (b) all present and future substitutions, replacements,
appurtenances, accessories, accessions and materials and supplies relating to
any of the foregoing; (c) all of Borrower's present and future books and records
in any form, in or on any media, including data processing materials in any form
(including software, tapes, discs and the like), whether in the possession of
Borrower or any other person; and (d) all present and future proceeds and
products of all of the foregoing in any form whatsoever and all rights,
including rights to the payment of money for any reason, arising on account of
any sale, assignment, lease, rental, license, exchange, liquidation,
condemnation, taking, theft or any disposition of any nature of, or any damage
or casualty to, or any loss with respect to, any of the foregoing or any rights
2
or interests of Borrower in any of the foregoing, including, without limitation,
cash proceeds (including all payments under any indemnities, warranties or
guaranties payable with respect to any of the foregoing), noncash proceeds and
proceeds acquired with cash proceeds, whether any such proceeds constitute
consumer goods, farm products, equipment, inventory, documents of title, chattel
paper, accounts, instruments or general intangibles, and all proceeds of
insurance policies insuring any of the foregoing or any risks to Borrower
associated with any of the foregoing.
"Common Stock" shall mean the common stock of the Reorganized Company
par value $.0001 per share.
"Confirmation Order" shall mean an order, which shall include orders of
the Bankruptcy Court that have the effect, except as contemplated by the Plan,
of vesting all licenses, permits, authorizations, registrations and other
governmental or regulatory requirements to conduct the business of the Company
in the Reorganized Company without any further action, filing, notice,
declaration or registration by them, and otherwise in form and substance
reasonably acceptable to the Purchasers entered by the Bankruptcy Court in the
Chapter 11 Case confirming the Plan pursuant to Section 1129 of the Bankruptcy
Code.
"Conversion Shares" shall mean shares of the Common Stock issued in
accordance with the Notes or issuable upon conversion of the Notes or in
accordance with the Warrants or issuable upon exercise of the Warrants.
"Copyrights" shall mean all of Borrower's right, title and interest,
whether now owned or existing or hereafter acquired or arising, in and to all
domestic and foreign copyrights, copyright registrations and copyright
applications, whether or not registered or filed with any governmental
authority, together with:
(a) all renewals thereof,
(b) all present and future rights of Borrower under all present
and future license agreements relating thereto, whether Borrower is licensee or
licensor thereunder,
(c) all income, royalties, damages and payments now or hereafter
due and/or payable to Borrower thereunder or with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof,
(d) all of Borrower's present and future claims, causes of action
and rights to ▇▇▇ for past, present or future infringements thereof, and
(e) all rights corresponding thereto throughout the world.
"Default" shall mean any event which, with the giving of notice or
passage of time (or both), would constitute an Event of Default.
3
"Disclosure Statement" shall mean the disclosure statement filed in
connection with the Plan in the Chapter 11 Case.
"Documents" shall mean all of Borrower's right, title and interest,
whether now owned or hereafter acquired, in, to and under all "documents" as
defined in the UCC (whether negotiable or non-negotiable) or other receipts
covering, evidencing or representing goods.
"Effective Date" shall mean the business day on which all conditions
precedent to the effectiveness of the Plan shall have been satisfied or waived.
"Encumbrance" shall mean, with respect to any Person, any mortgage,
Lien, pledge, security interest or other encumbrance, or any interest or title
of any vendor, lessor, lender or other secured party to or of such Person under
any conditional sale or other title retention agreement or capital lease, upon
or with respect to any property or asset of such Person (including in the case
of stock, stockholder agreements, voting trust agreements, voting rights
agreements and all similar arrangements).
"Equipment" shall mean all of Borrower's right, title and interest,
whether now owned or hereafter acquired, in, to and under all "equipment" as
defined in the UCC and shall include all Documents representing the same.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean any Person (whether or not incorporated)
which, by reason of its relationship with the Company, is required to be
aggregated with the Company under Sections 414(b), 414(c) or 414(m) of the Code,
or which, together with the Company, is a member of a controlled group within
the meaning of Section 4001(a) of ERISA.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of the
SEC thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Exchange Act shall include reference to the comparable
section, if any, of such successor federal statute.
"Existing Lien Holders" shall mean The ▇▇▇▇▇▇▇▇ Group with respect to
the ▇▇▇▇▇▇▇▇ Cash Collateral Agreement and Zions First National Bank with
respect to the Bridgeview Financial Residual Payment Account.
"GAAP" shall mean United States generally accepted accounting
principles.
"Governmental Entity" shall mean any supranational, national, foreign,
federal, state or local judicial, legislative, executive, administrative or
regulatory body or authority.
"Indebtedness" shall include all items which would properly be included
in the liability section of a balance sheet or in a footnote to a financial
statement in accordance with GAAP, and shall also include all contingent
liabilities.
"Inventory" shall mean all of Borrower's right, title and interest,
whether now owned or hereafter acquired, in, to and under all "inventory" as
defined in the UCC and shall include all Documents representing the same.
"Investment" shall mean the Purchase Price, in whole or in part.
"IRS" shall mean the Internal Revenue Service.
4
"Knowledge" of a party hereto shall mean the actual knowledge after
reasonable inquiry of current officers, directors and other employees of such
party reasonably believed to have knowledge of such matters.
"Law" shall mean any law, statute, ordinance, rule, regulation, order,
judgment, decree or body of law of any Governmental Entity.
"Liability" shall mean any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due and regardless of when asserted), including, without limitation, any
liability for Taxes, or for Claims against the Company with respect to periods
prior to the Closing Date.
"Licenses" shall mean all present and future licenses and license
agreements of Borrower, and all rights of Borrower under or in connection
therewith, whether Borrower is licensee or licensor thereunder, including,
without limitation, any present or future franchise agreements under which
Borrower is franchisee or franchisor, together with:
(a) all renewals thereof,
(b) all income, royalties, damages and payments now or hereafter
due and/or payable to Borrower thereunder or with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof,
(c) all claims, causes of action and rights to ▇▇▇ for past,
present or future infringements thereof, and
(d) all rights corresponding thereto throughout the world.
"Lien" means any Claim, lien (statutory or otherwise), Encumbrance,
pledge, Liability, restriction (including, without limitation, restrictions on
transfer), charge, instrument, license, preference, priority, security
agreement, easement, covenant, right of recovery, option, charge, hypothecation,
easement, security interest, interest, right of way, encroachment, mortgage,
deed of trust, imperfection of title, prior assignments, Tax (including foreign,
federal, state and local Tax), order of any Governmental Entity or other
Encumbrance or charge of any kind or nature whatsoever including, without
limitation (i) any conditional sale or other title retention agreement and any
lease having substantially the same effect as any of the foregoing; (ii) any
assignment or deposit arrangement in the nature of a security device; (iii) any
Claim based on any theory that the Purchasers are successors, transferees or
continuations of the Company or its business; and (iv) any leasehold interest,
license or other right, in favor of a third party or the Company, whether
secured or unsecured, ▇▇▇▇▇▇ or inchoate, filed or unfiled, scheduled or
unscheduled, noticed or unnoticed, recorded or unrecorded, contingent or
non-contingent, material or non-material, known or unknown.
"Material Adverse Effect" shall mean, when used in connection with the
Company or the Reorganized Company, any change, effect, event, occurrence or
development that is, or is reasonably likely to be, materially adverse to the
business, results of operations or financial condition of the Company and its
Subsidiaries, taken as a whole.
5
"▇▇▇▇▇▇▇▇ Cash Collateral Agreement" shall mean that certain Cash
Collateral Agreement, dated as of September 9, 2003, by and between the Company
and The ▇▇▇▇▇▇▇▇ Group.
"New Common Shares" shall mean the number of newly issued shares of
common stock of the Reorganized Company in accordance with the Plan.
"Note" shall mean the 3% Senior Convertible Secured Note in the form
attached hereto as Exhibit A and all renewals, replacements and extensions
thereof.
"Notes" shall mean more than one Note and collectively the Notes.
"Obligations" shall mean, as the same may be amended, modified,
extended, renewed, supplemented, increased, refinanced, consolidated or replaced
from time to time, all present and future obligations, indebtedness and
liabilities of Borrower to the Purchasers arising under the Notes (including,
without limitation, all principal amounts, interest charges, fees and all other
charges and sums, as well as all costs and expenses, including reasonable
attorneys' fees and expenses, payable or reimbursable by Borrower under or
pursuant to this Agreement and the Notes).
"Ordinary Course of Business" shall mean the ordinary course of
business of the Company.
"Patents" shall mean all of Borrower's right, title and interest,
whether now owned or existing or hereafter acquired or arising, in and to all
United States and foreign patents, and pending and abandoned United States and
foreign patent applications, including, without limitation, the inventions and
improvements described or claimed therein, together with
(a) any reissues, divisions, continuations, certificates of
reexamination, extensions and continuations-in-part thereof,
(b) all present and future rights of Borrower under all present
and future license agreements relating thereto, whether Borrower is licensee or
licensor thereunder,
(c) all income, royalties, damages and payments now or hereafter
due and/or payable to Borrower thereunder or with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof,
(d) all of Borrower's present and future claims, causes of action
and rights to ▇▇▇ for past, present or future infringements thereof, and
(e) all rights corresponding thereto throughout the world.
6
"PBGC" shall mean the United States Pension Benefit Guaranty
Corporation.
"Permitted Liens" shall mean:
(a) Liens of the Purchasers;
(b) Liens for taxes not delinquent or for taxes being diligently
contested in good faith by Borrower by appropriate proceedings;
(c) mechanic's, artisan's, materialman's, landlord's, carrier's or
other like Liens arising in the ordinary course of business with respect to
obligations which are not due;
(d) Liens arising out of a judgment, order or award with respect
to which Borrower shall in good faith be prosecuting diligently an appeal or
proceeding for review and with respect to which there shall be in effect a
subsisting stay of execution pending such appeal or proceeding for review,
provided appropriate reserves therefor are established by Borrower in accordance
with GAAP;
(e) any deposit of funds made in the ordinary course of business
to secure obligations of Borrower under worker's compensation laws, unemployment
insurance laws or similar legislation, to secure public or statutory obligations
of Borrower, to secure surety, appeal or customs bonds in proceedings to which
Borrower is a party, or to secure Borrower's performance in connection with
bids, tenders, contracts (other than contracts for the payment of money), leases
or subleases made by Borrower in the ordinary course of business;
(f) Liens specifically consented to by the Purchasers in writing;
(g) Liens of the Existing Lien Holders.
"Person" shall mean any individual, firm, corporation, limited
liability company, partnership, company, trust or other entity, and shall
include any successor (by merger or otherwise) of such entity.
"Plan" shall mean the plan of reorganization in a form acceptable to
the Company and the Purchasers and embodying the terms set forth in the Plan
attached hereto as Exhibit B, with such changes as may be reasonably acceptable
to the Company and the Purchasers hereafter, together with all contracts,
agreements, schedules, exhibits, certificates, orders and other documents
prepared in connection therewith; provided, however, that any such change shall
require the prior written consent of each Purchaser, in its sole and absolute
discretion.
"Purchase Price" shall mean the sum of the First Purchase Price and the
Second Purchase Price.
"Receivables" shall mean all of Borrower's right, title and interest,
whether now owned or hereafter acquired, in, to and under any accounts, chattel
paper, instruments, general intangibles (including payment intangibles),
investment property, commodity accounts, commodity contracts, letter of credit
rights, Documents, insurance policies, drafts, bills of exchange, trade
acceptances, notes or other indebtedness (as such terms are defined in the UCC
to the extent that they are defined therein) owing to Borrower from whatever
source arising.
7
"Reorganized Company" shall mean the Company on and after the Effective
Date of the Plan.
"SEC" shall mean the United States Securities and Exchange Commission
and any successor Governmental Entity.
"Securities" shall mean the Notes and the Warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the SEC
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Act shall include reference to the
comparable section, if any, of such successor federal statute.
"Superior Proposal" shall mean an unsolicited, bona fide written offer
made by a third party to consummate an Alternative Proposal, which Alternative
Proposal is likely to be consummated, and that (i) the Board of Directors
determines in good faith, after consulting with its outside legal counsel and
its financial advisor, would, if consummated, result in a transaction that is
more favorable to the Company than the transactions contemplated hereby (taking
into account all legal, financial, regulatory and other aspects of the proposal
and the person making the proposal), and (ii) is for at least eighty percent
(80%) of common stock of the Company or the Reorganized Company.
"Tax" or "Taxes" shall mean any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A of the Code), customs duties, capital stock, franchise, capital
gains, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty or addition thereto.
"Tax Return" shall mean any return, declaration, report, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Trademarks" shall mean all of Borrower's right, title and interest,
whether now owned or existing or hereafter acquired or arising, in and to all
domestic and foreign trademarks, trademark registrations, trademark applications
and trade names, whether or not registered or filed with any governmental
authority, together with:
(a) all renewals thereof,
(b) all present and future rights of Borrower under all present
and future license agreements relating thereto, whether Borrower is licensee or
licensor thereunder,
(c) all income, royalties, damages and payments now or hereafter
due and/or payable to Borrower thereunder or with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof,
8
(d) all of Borrower's present and future claims, causes of action
and rights to ▇▇▇ for past, present or future infringements thereof, and
(e) all rights corresponding thereto throughout the world.
"Transaction Documents" shall mean this Agreement, the Registration
Rights Agreement, the Notes, the Warrants and all other contracts, agreements,
schedules, certificates, orders and other documents being delivered pursuant to
or in connection with this Agreement.
"UCC" shall mean with respect to any Collateral, the Uniform Commercial
Code as in effect from time to time in the State of New York; provided, that if
by reason of mandatory provisions of law, the perfection or the effect of
perfection or non-perfection or priority of the security interest in any item or
portion of the Collateral governed by the Uniform Commercial Code as in effect
in a jurisdiction other than the State of New York, "UCC" shall mean the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection or priority. Wherever this agreement refers to terms as defined
in the UCC, if such term is defined in more than one Article of the UCC, the
definition of Article 9 of the UCC shall control.
"Warrant" shall mean the Warrant in the form attached hereto as Exhibit
C to purchase the number of shares of Common Stock, as the same may be amended,
restated, extended, renewed, replaced or otherwise modified from time to time.
"Warrants" shall mean more than one Warrant and collectively the
Warrants.
Section 1.2 Other Definitions. The following terms shall have the
meanings defined in the Section indicated:
Agreement...................................................Preamble
Alternative Proposal..................................Section 6.2(a)
Amended Certificate of Incorporation.....................Section 4.4
Bankruptcy Code.............................................Recitals
Bankruptcy Court............................................Recitals
Break-Up Fee.............................................Section 8.2
Chapter 11 Case.............................................Recitals
Closing..................................................Section 3.1
Closing Date.............................................Section 3.1
Commercial Software..................................Section 4.12(c)
Company.....................................................Preamble
Company Confidential Information......................Section 6.3(f)
Company Disclosure Schedule...............................Article IV
Contract................................................Section 4.10
Disclosure Statement Approval Order......................Section 6.6
Employees...............................................Section 4.13
Employee Plan...........................................Section 4.17
Environmental and Safety Requirements...................Section 4.21
9
Event of Default........................................Section 10.1
Expense Reimbursement Fee................................Section 8.2
Financial Advisory Fees..................................Section 4.7
Financial Statements....................................Section 4.15
First Closing............................................Section 3.1
First Purchase Price.....................................Section 2.1
Governmental Requirements................................Section 4.4
Intellectual Property................................Section 4.12(a)
Licensed Software....................................Section 4.12(e)
Management Option Plan..................................Section 6.13
Owned Software.......................................Section 4.12(d)
Permits.................................................Section 4.14
Petition Date...............................................Recitals
Proceeding...............................................Section 9.2
Purchasers..................................................Preamble
Purchaser Disclosure Schedule..............................Article V
Registration Rights Agreement............................Section 6.7
Restraint.............................................Section 7.1(a)
Restructuring............................................Section 6.6
SEC Reports..............................................Section 4.8
Second Closing...........................................Section 3.3
Second Purchase Price....................................Section 2.2
Selected Courts.......................................Section 9.2(a)
Subsidiary............................................Section 4.1(b)
10
ARTICLE II
PURCHASE AND SALE OF THE SECURITIES
Section 2.1 Issuance and Sale of Notes and Warrants at First Closing.
(a) Upon the terms and subject to the conditions set forth herein,
at the First Closing, the Reorganized Company shall issue and sell to (i) each
of the Purchasers set forth on Exhibit D-1 attached hereto a Note in the
principal amount set forth opposite such Purchaser's name on Exhibit D-1 and
(ii) each of the Purchasers set forth on Exhibit E-1 attached hereto a Warrant
registered in the name of such Purchaser (or its nominee or designee as
designated by the Purchaser to the Reorganized Company at least three (3)
Business Days prior to the Closing Date) to purchase the number of shares of
Common Stock set forth opposite such Purchaser's name on Exhibit E-1.
(b) In consideration of the issuance of the Notes and Warrants at
the First Closing, each Purchaser shall pay to the Reorganized Company an amount
equal to the sum of (i) the principal amount set forth opposite such Purchaser's
name on Exhibit D-1 and (ii) the warrant purchase amount set forth opposite such
Purchaser's name on Exhibit E-1. The sum of the aggregate principal amount of
all Notes and the aggregate purchase amount of all Warrants purchased at the
First Closing shall be equal to $811,050 (the "First Purchase Price").
Section 2.2 Issuance and Sale of Notes and Warrants at Second Closing.
(a) Upon the terms and subject to the conditions set forth herein,
at the Second Closing, the Reorganized Company shall issue and sell to (i) each
of the Purchasers set forth on Exhibit D-2 attached hereto a Note in the
principal amount set forth opposite such Purchaser's name on Exhibit D-2 and
(ii) each of the Purchasers set forth on Exhibit E-2 attached hereto a Warrant
registered in the name of such Purchaser (or its nominee or designee as
designated by the Purchaser to the Reorganized Company at least three (3)
Business Days prior to the Closing Date) to purchase the number of shares of
Common Stock set forth opposite such Purchaser's name on Exhibit E-2.
(b) In consideration of the issuance of the Notes and Warrants at
the Second Closing, each Purchaser shall pay to the Reorganized Company an
amount equal to the sum of the (i) principal amount set forth opposite such
Purchaser's name on Exhibit D-2 and (ii) the warrant purchase amount set forth
opposite such Purchaser's name on Exhibit E-2. The sum of the aggregate
principal amount of all Notes and the aggregate purchase amount of all Warrants
purchased at the Second Closing shall be equal to $789,050 (the "Second Purchase
Price").
11
ARTICLE III
THE CLOSING
Section 3.1 The First Closing. The closing of the purchase and sale of
the Notes and Warrants under Section 2.1 hereof and the other transactions
contemplated hereby (the "First Closing") shall take place at the offices of
Fulbright & ▇▇▇▇▇▇▇▇ L.L.P., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, at a
date (the "Closing Date") and time to be mutually agreed upon by the Company and
the Purchasers, which shall be at least three (3) but no more than ten (10)
Business Days after the date following the satisfaction (or waiver by the
Purchasers or the Company, as appropriate) of all of the conditions set forth in
Article VII (other than those conditions that by their nature are to be
satisfied at the First Closing, but subject to the satisfaction or waiver of
those conditions).
Section 3.2 First Closing Deliveries. (a) At the First Closing, the
Reorganized Company shall deliver the executed Notes and Warrants to the
Purchasers in accordance with Section 2.1.
(b) At the First Closing, each Purchaser shall deliver or cause to
be delivered to the Reorganized Company an amount equal to the sum of the
principal amount set forth opposite such Purchaser's name on Exhibit D-1 and the
warrant purchase price set forth opposite such Purchaser's name on Exhibit E-1
in cash by wire transfer of immediately available funds to an account designated
at least three (3) Business Days prior to the Closing Date by the Reorganized
Company.
(c) At the First Closing, the Company shall deliver to the
Purchasers the officers' certificates required under Sections 7.1(b) and 7.1(c).
Section 3.3 The Second Closing. Within ten (10) days of the date of the
Confirmation Order, the closing of the purchase and sale of the Notes and
Warrants in accordance with Section 2.2 (the "Second Closing") shall take place
at the offices of Fulbright & ▇▇▇▇▇▇▇▇ L.L.P., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇.
Section 3.4 Second Closing Deliveries. (a) At the Second Closing, the
Reorganized Company shall deliver the executed Notes and Warrants to the
Purchasers in accordance with Section 2.2.
(b) At the Second Closing, each Purchaser shall deliver or cause
to be delivered to the Reorganized Company the sum of the principal amount set
forth opposite such Purchaser's name on Exhibit D-2 and the warrant purchase
amount set forth opposite such Purchaser's name on Exhibit E-2 in cash by wire
transfer of immediately available funds to an account designated at least three
(3) Business Days prior to the Closing Date by the Reorganized Company.
(c) At the Second Closing, the Company shall deliver to the
Purchasers the officers' certificates required under Sections 7.1(b) and 7.1(c).
12
ARTICLE IV
REPRESENTATIONS AND WARRANTiES OF the COMPANY
Except as specifically set forth in the disclosure schedule prepared
and signed by the Company (the "Company Disclosure Schedule") and delivered to
the Purchasers simultaneously with the execution and delivery hereof, the
Company represents and warrants to the Purchasers that all of the statements
contained in this Article IV are true and correct as of the date of this
Agreement (or, if made as of a specified date, as of such date).
Section 4.1 Organization. Subsidiaries. (a) Except as set forth on
Section 4.1(a) of the Company Disclosure Schedule, the Company and each of its
Subsidiaries is a corporation or other legal entity duly organized, validly
existing and (in the jurisdictions recognizing the concept) in good standing
under the laws of the jurisdiction in which it is organized and has the
requisite corporate or other power and authority to own, lease and operate its
properties and to conduct its business as it is now being conducted. The Company
and each of its Subsidiaries is duly qualified or licensed as a foreign entity
to do business and is in good standing (and has paid all relevant franchise or
analogous taxes) in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such qualification or
licensing necessary, except for any failure to be qualified which individually
or in the aggregate would not have a Material Adverse Effect.
(b) Section 4.1(b) of the Company Disclosure Schedule sets forth,
as of the date hereof, (i) each corporation, limited liability company,
partnership, business association or other Person in which the Company owns any
direct or indirect equity interest (each a "Subsidiary," and collectively the
"Subsidiaries"), (ii) the ownership interest therein of the Company or such
other Subsidiary, and (iii) if such Subsidiary is not directly or indirectly
wholly-owned by the Company, the identity and ownership interest of each of the
other owners of such Subsidiary.
(c) Except as set forth in Section 4.1(c) of the Company
Disclosure Schedule, (i) the Company owns, either directly or indirectly through
one or more Subsidiaries, all of the capital stock or other equity interests of
the Subsidiaries free and clear of all Encumbrances and (ii) there are no
outstanding subscription rights, options, warrants, convertible or exchangeable
securities or other rights of any character whatsoever relating to issued or
unissued capital stock or other equity interests of any Subsidiary, or any
commitments of any character whatsoever relating to issued or unissued capital
stock or other equity interests of any Subsidiary or pursuant to which any
Subsidiary is or may become bound to issue or grant additional shares of its
capital stock or other equity interests or related subscription rights, options,
warrants, convertible or exchangeable securities or other rights, or to grant
preemptive rights, which, in each case, will be in effect immediately following
the Closing.
Section 4.2 Due Authorization. Subject to the approval of the
Bankruptcy Court, the Company has all corporate right, power and authority to
enter into this Agreement and each of the other Transaction Documents to which
it is a party, to consummate the transactions contemplated hereby and thereby
and to comply with the terms, conditions and provisions hereof and thereof. The
execution and delivery by the Company of this Agreement and of each other
Transaction Document to which it is a party is, and the issuance, sale and
13
delivery of each of the Securities and the Conversion Shares by the Reorganized
Company and the compliance by the Company (or the Reorganized Company, as the
case may be) with each of the provisions of this Agreement and of each other
Transaction Document to which it (or the Reorganized Company, as the case may
be) is a party will, upon the approval of the Bankruptcy Court, be (i) within
the corporate power and authority of the Company (or the Reorganized Company, as
the case may be) and (ii) have been duly authorized by all requisite corporate
action of the Company (or the Reorganized Company, as the case may be). This
Agreement has been, and each of the other Transaction Documents to which the
Company (or the Reorganized Company, as the case may be) is a party when
executed and delivered by the Company (or the Reorganized Company, as the ease
may be) will be, duly and validly executed and delivered by the Company (or the
Reorganized Company, as the case may be), and this Agreement constitutes, and
each of such other Transaction Documents when executed and delivered by the
Company (or the Reorganized Company, as the case may be) will constitute, upon
approval of the Bankruptcy Court, a valid and binding agreement of the Company
(or the Reorganized Company, as the case may be), enforceable against the
Company (or the Reorganized Company, as the case may be) in accordance with its
terms, except as such enforcement is limited by bankruptcy, reorganization,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally and limitations imposed by general principles of equity.
Section 4.3 Capitalization. (a) Except as set forth in Section 4.3 of
the Company Disclosure Schedule and the Plan and except for the transactions
contemplated by this Agreement, the other Transaction Documents or any benefit
plans approved by the Purchasers, there are no outstanding subscription rights,
options, warrants, convertible or exchangeable securities or other rights of any
character whatsoever to which the Company is a party relating to issued or
unissued capital stock of the Company, or any commitments of any character
whatsoever relating to issued or unissued capital stock of the Company or
pursuant to which the Company or any of the Subsidiaries are or may become bound
to issue or grant additional shares of their capital stock or related
subscription rights, options, warrants, convertible or exchangeable securities
or other rights, or to grant preemptive rights, which, in each instance, will be
in effect immediately following the Closing. Except as contemplated by this
Agreement, the Plan and the Registration Rights Agreement, there are no voting
trusts, stockholders agreements, proxies or other understandings in effect to
which the Company is a party with respect to the voting or transfer of any of
common stock of the Company or the Reorganized Company that will be outstanding
as of the Closing.
(b) As of the Closing, after giving effect to the Investment and
the Restructuring contemplated hereby, the authorized capital stock of the
Reorganized Company shall be 10,000,000 of shares of Common Stock, of which (i)
1,175,725 shares shall be outstanding (of which 1,102,242 shares shall be issued
to the unsecured creditors of the Company on a pro-rata basis in resolution of
their creditor claims pursuant to the Restructuring), (ii) 5,143,795 shares
shall have been reserved for issuance upon conversion of the Notes, (iii)
734,828 shares shall have been reserved for issuance upon exercise of the
Warrants and (iv) 293,933 shares shall have been reserved for issuance under the
Management Option Plan;
14
(c) The Conversion Shares have been duly reserved for issuance
upon conversion of the Notes and exercise of the Warrants.
(d) None of the issuance and delivery of the Securities, the
issuance and delivery of any Conversion Shares upon conversion of the Notes and
exercise of the Warrants is subject to any preemptive right of any Stockholder
of the Reorganized Company or to any right of first refusal or other similar
right of any Person.
Section 4.4 Consents and Approvals. No consent, approval, authorization
of, declaration, filing, or registration with, any Governmental Entity or any
stock exchange where the Common Stock is listed is required to be made or
obtained by either the Company or any of its Subsidiaries in connection with the
execution, delivery, and performance of this Agreement or any of the other
Transaction Documents contemplated hereby, except for the filing of (i) an
amended Certificate of Incorporation (the "Amended Certificate of
Incorporation") with the Secretary of State of the State of Delaware and (ii)
the Confirmation Order. The items referred to in clauses (i) and (ii) of this
Section 4.4 are hereinafter referred to as the "Governmental Requirements."
Section 4.5 No Violations. Assuming that the Governmental Requirements
will be satisfied, made or obtained and will remain in full force and effect and
the conditions set forth in Article VII will be satisfied, except as
contemplated by the Plan and the reorganization of the Company under the Plan
(including any consents required thereunder), neither the execution, delivery or
performance by the Company of this Agreement or any of the other Transaction
Documents to which the Company (or the Reorganized Company, as the case may be)
is a party nor the consummation of the transactions contemplated hereby or
thereby will: (i) conflict with, or result in a breach or a violation of, any
provision of the certificate of incorporation or bylaws or other organizational
documents of the Company or any of its Subsidiaries (or the Reorganized Company,
as the case may be) or rules of any stock exchange where the Common Stock is
listed or (ii) as of the Closing, constitute, with or without notice or the
passage of time or both, a breach, violation or default, create an Encumbrance
or give rise to any right of termination, modification, cancellation,
prepayment, suspension, limitation, revocation or acceleration, under any Law or
any provision of any agreement or other instrument to which the Company or any
of its Subsidiaries is a party or pursuant to which the Company or any of its
Subsidiaries or any of their respective assets or properties is subject.
Section 4.6 Compliance with Laws. Except as set forth in Section 4.6 of
the Company Disclosure Schedule, the Company and its Subsidiaries are in
compliance with all Laws, and neither the Company nor any of its Subsidiaries
has received any notice of any alleged violation of Law. The Company and its
Subsidiaries hold all other licenses, franchises, permits, consents,
registrations, certificates, and other governmental or regulatory permits,
authorizations or approvals required for the operation of the business as
presently conducted and for the ownership, lease or operation of the assets of
the Company and its Subsidiaries.
Section 4.7 Financial Advisory Fees. No agent, broker, investment bank
or other financial advisor is or will be entitled to any fee, commission,
expense or other amount from the Company or any of its Subsidiaries in
connection with any of the transactions contemplated by this Agreement or the
other Transaction Documents except for (a) those fees, payments and agreements
to pay approved by the Bankruptcy Court and (b) other Persons (i) hired by the
15
Company after the date of this Agreement in connection with the Chapter 11 Case
or (ii) required or authorized to be paid by the Company by the Bankruptcy Code
or by an order of the Bankruptcy Court (collectively, the "Financial Advisory
Fees"). The Company has provided the Purchasers with a true and complete list of
all Financial Advisory Fees, which has been approved by the Purchaser.
Section 4.8 SEC Documents; Forecasts. Except as set forth in Section
4.8 of the Company Disclosure Schedule, the Company has filed all reports
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) of the Exchange Act, for the two
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials, including the
exhibits thereto, being collectively referred to herein as the "SEC Reports") on
a timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such extension. As of
their respective dates, the SEC Reports complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, as applicable, and none of
the SEC Reports, when filed, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements of
the Company included in the SEC Reports were prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of the Company and its Subsidiaries, as of the dates thereof (subject,
in the case of any unaudited statements, to the absence of footnotes and to
normal year-end audit adjustments). As of the time of the filing of the relevant
SEC Report, the financial forecasts included in the SEC Reports (as qualified
and limited in the SEC Reports) were made by management of the Company in good
faith and on a reasonable basis. No Subsidiary of the Company is currently
required to file any periodic reports with the SEC under the Exchange Act.
Section 4.9 Taxes. (a) All Tax Returns required to be filed by or on
behalf of the Company and Subsidiaries and any affiliated group (within the
meaning of Section 1504 of the Code) or combined, unitary or similar group of
which the Company or any Subsidiary is a member or was a member have been
properly and accurately compiled and completed and were duly and timely filed
with the appropriate taxing authorities during the period to which the Tax
Return relates in all jurisdictions in which such Tax Returns are required to be
filed (after giving effect to any valid extensions of time in which to make such
filings) and all such Tax Returns were true, complete and correct in all
material respects. All Taxes payable by the Company and Subsidiaries (whether or
not shown on any Tax Return), either directly, as part of the consolidated Tax
Return of another taxpayer, or otherwise, have been fully and timely paid.
Neither the Company nor any Subsidiary is currently the beneficiary of any
extension of time within which to file any Tax Return. No claim has been made in
writing by an authority in a jurisdiction where the Company or a Subsidiary does
not file Tax Returns that the Company or such Subsidiary is or may be subject to
taxation by that jurisdiction, which claim has not been resolved to the
satisfaction of the taxing authority. There are no security interests on any of
the assets of the Company and Subsidiaries that arose in connection with any
failure (or alleged failure) to pay any Tax.
16
(b) The Company and Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder or other third party.
(c) Neither the Company nor any Subsidiary is currently being
audited or examined by any taxing authority and has received from any taxing
authority any written notice of any intention to conduct an audit or an
examination to assess any additional Taxes for any period for which Tax Returns
have been filed. There is no dispute or claim concerning any Tax liability of
the Company or any Subsidiary either (i) claimed or raised by any authority in
writing or (ii) as to which the Company has Knowledge based upon personal
contact with any agent of such authority. The Company has made available to the
Purchasers correct and complete copies of all federal and state income or
franchise Tax Returns for all taxable years ended on or after December 31, 2003,
and all examination reports and statements of deficiencies assessed against or
agreed to by the Company since January 1, 2003.
(d) Neither the Company nor any Subsidiary has waived any statute
of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(e) Neither the Company nor any Subsidiary has filed a consent
under Section 341(f) of the Code concerning collapsible corporations.
(f) Neither the Company nor any Subsidiary has made any payments,
is obligated to make any payments, and is a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code.
(g) Neither the Company nor any Subsidiary has been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code.
(h) Neither the Company nor any Subsidiary is a party to any Tax
allocation or sharing agreement.
(i) Neither the Company nor any Subsidiary (i) has been a member
of an affiliated group (within the meaning of Section 1504 of the Code) filing a
consolidated federal income Tax Return (other than a group the common parent of
which was the Company) and (ii) has any liability for the Taxes of any Person
(other than the Company) under Treas. Reg. ss.1.1502-6 (or any similar provision
of state, local or foreign law), as a transferee or successor, by contract or
otherwise.
17
(j) All material elections and consents with respect to any Tax
(or the computation thereof) affecting the Company and Subsidiaries as of the
date hereof are obvious from the Tax Returns or are set forth on the Company
Disclosure Schedule.
(k) Neither the Company nor any Subsidiary has agreed to make and
is required to make, nor has the IRS proposed, any adjustment under Section
481(a) of the Code or any similar provisions of state, local or foreign law by
reason of a change in accounting method or otherwise.
(l) The unpaid Taxes of the Company and Subsidiaries (i) did not,
as of the date of the latest balance sheet included in the Financial Statements,
exceed the reserve for tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the face of the latest balance sheet included in the Financial Statements
(rather than in any notes thereto) and (ii) do not exceed that reserve as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of the Company in filing its Tax Returns.
(m) Neither the Company nor any Subsidiary has executed or entered
into a closing agreement pursuant to Section 7121 of the Code or any predecessor
provision thereof or any similar provision of state, local or foreign law.
(n) Neither the Company nor any Subsidiary is subject to any
private letter ruling of the IRS or comparable rulings of other taxing
authorities.
(o) Neither the Company nor any Subsidiary has constituted either
a "distributing corporation" or a "controlled corporation" within the meaning of
Section 355(a)(1)(A) of the Code in a distribution of qualifying for tax-free
treatment under Section 355 of the Code (i) in the two years prior to this
Agreement and (ii) in a distribution that could otherwise constitute part of a
"plan" or "series of transactions" (within the meaning of Section 355(e) of the
Code) in conjunction with this Agreement.
Section 4.10 Contracts. The Company has provided the Purchasers with
complete and correct copies of all written contracts, agreements, leases,
obligations, commitments, or covenants to which the Company is a party at the
Closing Date and which involve, in each case, aggregate benefits or liabilities,
of in excess of $10,000 (collectively, the "Contracts"). Except for the
Contracts set forth in Section 4.10 of the Company Disclosure Schedule, there
are no other contracts or arrangements to which the Company is a party. Except
as set forth in Section 4.10 of the Company Disclosure Schedule, none of the
Contracts has been pledged or assigned and (a) there is no default by Company,
or to the Knowledge of the Company, any other Person under any Contract; (b) the
Company has not received written or other notice that any Person intends to
cancel or terminate any Contract or exercise or not exercise any right, remedy
or other option thereunder; (c) all of the Contracts are legally valid, binding
and enforceable in accordance with their respective terms and are in full force
and effect without amendment or modification; (d) the Company has not waived any
right under any Contract; and (e) the Company has not received notice of
default, counterclaim, offset or defense under any Contract.
18
Section 4.11 Litigation. Except for the Chapter 11 Case or as set forth
in Section 4.11 of the Company Disclosure Schedule, there are no suits, actions,
claims, orders, charges, complaints, investigations or legal or administrative
or grievance/arbitration proceedings in respect of the Company or its assets,
pending or, to the Company's Knowledge, threatened, (a) whether at law or in
equity, or before or by any federal, foreign, state or municipal or other
governmental department, commission, board, bureau, agency or instrumentality
against the Company or its business or (b) against any officer, director or
employee of any of the Company in connection with the officer's, director's or
employee's relationship with, or actions taken on behalf of the Company's
business or proposed business activities. Except for the Chapter 11 Case or as
set forth in Section 4.11 of the Company Disclosure Schedule, there are no
pending judgments, decrees, injunctions or orders of any court or governmental
authority, or arbitrator against the Company, any of its assets or its business.
Section 4.12 Intellectual Property Assets. (a) The Company has good and
indefeasible title, free and clear of all Liens or other Claims, to all licenses
or other rights to use all patents, patent applications, trademarks, trademark
applications, service marks, service ▇▇▇▇ applications, trade names, copyrights,
formulae, compositions, confidential information, ideas, inventions, domain
names, corporate names, trade secrets, customer lists, know-how, processes and
techniques, drawings, specifications, designs, logos, plans, improvements,
proposals, technical and computer data, documentation and software, financial,
business and marketing plans and all other proprietary, industrial or
intellectual property rights relating to the Company's business or operations
(collectively, "Intellectual Property") currently used by the Company and all
Intellectual Property necessary for the operation of the Company's business as
now conducted and, to the Knowledge of the Company, as presently contemplated to
be conducted in the future, or the Company has rights to use such Intellectual
Property under valid license or lease agreements.
(b) To the knowledge of the Company, the Company has not
infringed, misappropriated or otherwise violated any Intellectual Property of
any third parties, and the Company is not aware of any infringement,
misappropriation or conflict which will occur as a result of the continued
operation of the Company as presently operated and as contemplated to be
operated.
(c) Section 4.12 of the Company Disclosure Schedule sets forth a
complete and correct list and summary description of all trademarks, trade
names, service marks, service names, brand names, copyrights, patents, Internet
domain name addresses, registrations thereof and applications therefor,
applicable to or used in the business of the Company, and, where appropriate,
the date, serial or registration number, and place of any registration thereof,
together with a complete list of all licenses granted by or to the Company with
respect to any of the above (other than licenses of readily available commercial
software applications with initial license fees or annual license or maintenance
fees ("Commercial Software")), and all applications for such that are in the
process of being prepared, owned by or registered in the name of the Company, or
of which the Company is a licensor or licensee or in which the Company has any
right, and in each case a brief description of the nature of such right.
19
(d) Section 4.12 of the Company Disclosure Schedule contains a
complete and accurate list of all computer software owned by the Company (the
"Owned Software"). The Company has sole and exclusive title to the Owned
Software, free and clear of all Liens or other Claims, including Claims or
rights of employees, agents, consultants, customers, licensees or other parties
involved in the development, creation, marketing, maintenance, enhancement or
licensing of such computer software. Except as set forth in Section 4.12 of the
Company Disclosure Schedule, the Owned Software is not dependent on any Licensed
Software, other than Commercial Software, in order to fully operate in the
manner in which it is intended. Except as set forth in Section 4.12 of the
Company Disclosure Schedule, no source code has been disclosed to or escrowed
with any parties. The Company has adequately maintained appropriate technical
documentation with respect to its Owned Software in accordance with industry
standards, including the source code, system documentation, statements of
principles of operation, and schematics for all software programs, as well as
any pertinent commentary or explanation that may be necessary to render such
materials understandable and usable by a trained computer programmer.
(e) Section 4.12 of the Company Disclosure Schedule contains a
complete and accurate list of all software under which the Company is a
licensee, lessee or otherwise has obtained the right of use other than
Commercial Software (the "Licensed Software"). Section 4.12 of the Company
Disclosure Schedule also sets forth a list of all license fees, rents,
royalties, maintenance, support or other charges that the Company is required or
obligated to pay with respect to the Licensed Software. The Company has the
right and license to use, sublicense, modify and copy the Licensed Software,
free and clear of any limitations from Liens or other Claims except as may be
set forth in any license agreements listed in Section 4.12 of the Company
Disclosure Schedule.
(f) All past and present personnel, including employees, agents,
consultants, and contractors, who have contributed to or participated in the
conception and development of the Owned Software, technical documentation, or
other Intellectual Property on behalf of the Company either (i) have been party
to a "work-for-hire" arrangement or agreement with the Company, in accordance
with applicable federal and state law, that has accorded the Company full,
effective, exclusive and original ownership of all tangible and intangible
property thereby arising, or (ii) have executed appropriate instruments of
assignment in favor of the Company as assignee that have conveyed to the Company
full, effective, and exclusive ownership of all tangible and intangible property
thereby arising.
(g) Section 4.12 of the Company Disclosure Schedule lists and
separately identifies all agreements pursuant to which the Company has been
granted rights to market software owned by third parties and all agreements
pursuant to which the Company has granted marketing or other rights in the Owned
or Licensed Software to third parties.
(h) No claim is pending or, to the Knowledge of the Company,
threatened to the effect that any such Intellectual Property owned or licensed
to or by the Company, or which the Company otherwise has the right to use, is
invalid or unenforceable by the Company or infringes upon the rights of any
third party; and there is no reasonable basis for any such claim to be made.
20
(i) Except as described in Section 4.12 of the Company Disclosure
Schedule, the Company has entered into confidentiality agreements substantially
in the forms provided to the Purchasers with all present and former employees,
agents, consultants or other persons having access to, or detailed knowledge of,
the operation of the Owned Software or other Intellectual Property.
(j) Section 4.12 of the Company Disclosure Schedule includes a
list of all source code escrow arrangements with respect to Owned Software that
is licensed for use by others by the Company, including the subject thereof, the
names of the parties thereto and the date thereof. The Company is in compliance
with its obligations, including but not limited to obligations to update source
code, under or in connection with each such escrow arrangement, and there has
been no release or claim for release of the source code deposited under any such
escrow arrangement.
(k) The consummation of the transactions contemplated by this
Agreement will result in the Reorganized Company having all right, title and
interest in and to the Intellectual Property and will not adversely affect the
right of the Reorganized Company to continue to use the Intellectual Property.
No registration of any Intellectual Property is required by law.
Section 4.13 Employee Matters. Section 4.13 of the Company Disclosure
Schedule contains a list of the names of all employees (including, without
limitation part-time, temporary and inactive employees), leased employees,
independent contractors and consultants of the Company, their respective
salaries or wages, other compensation and dates of employment and positions (the
"Employees"). The Company is not a party to any collective bargaining agreement
or other labor union contract, nor does the Company know of any activities or
proceedings of any labor union to organize its employees. Except as set forth in
Section 4.13 of the Company Disclosure Schedule, the Company has provided all
Employees with all wages, benefits and other compensation which became due and
payable through the date of this Agreement.
Section 4.14 Licenses and Permits. The Company has obtained each
federal, state, county, local or foreign governmental consent, license, permit,
grant or other authorization of a Governmental Entity (i) pursuant to which the
Company currently operates or holds any interest in any of its properties or
(ii) that is required for the operation of its business or the holding of any
such interest (collectively, "Permits"), other than those Permits the failure of
which to have would not adversely affect the ability of the Company to conduct
its business as currently conducted. All Permits are listed (with expiration
dates, if applicable) in Section 4.14 of the Company Disclosure Schedule and all
of such Permits are in full force and effect. No Permit is subject to revocation
or forfeiture by virtue of any existing circumstances, there is no Proceeding
pending or, to the Knowledge of the Company, threatened to modify or revoke any
Permit, and no Permit is subject to any outstanding order, decree, judgment,
stipulation or, to the Knowledge of the Company, investigation that would
reasonably be likely to materially adversely affect such Permit.
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Section 4.15 Financial Statements and Other Information. (a) The
Company has delivered to the Purchasers true, correct and complete copies of the
audited consolidated balance sheets of the Company as of December 31, 2001 and
2002, and the related statements of operations, retained earnings and cash flows
for each of the years in the two-year period ended December 31, 2002, together
with notes to such financial statements (the "Audited Financial Statements"),
and an unaudited consolidated balance sheet of the Company as of December 31,
2003, and the related unaudited statements of operations, retained earnings and
cash flows for the year then ended ("2003 Financial Statements," together with
the Audited Financial Statements, the "Financial Statements").
(b) The Financial Statements are in accordance with the books and
records of the Company and have been prepared in accordance with GAAP
consistently applied throughout the periods covered thereby, and the balance
sheets included therein present fairly as of their respective dates the
consolidated financial condition of the Company. The statements of operations,
retained earnings and cash flows included in the Financial Statements present
fairly the consolidated results of operations and cash flows of the Company for
the periods indicated, and the notes included in the Financial Statements
present fairly the information purported to be shown thereby.
(c) The accounts receivable of the Company, net of applicable
allowances in accordance with GAAP consistently applied, as set forth on the
latest balance sheet included in the Financial Statements or arising since the
date thereof are valid and genuine; have arisen solely out of bona fide sales
and deliveries of goods, performance of services and other business transactions
in the Ordinary Course of Business; are not, to the Knowledge of the Company,
subject to valid defenses, set-offs or counterclaims; and are current in all
material respects. The Company has fully performed all obligations with respect
thereto which it was obligated to perform to the date hereof. The Company has
delivered to the Purchasers an aging schedule for the accounts receivable of the
Company as of December 31, 2003. The reserves for doubtful accounts established
by the Company and reflected on the Financial Statements have been determined in
accordance with GAAP consistently applied.
(d) The books, records and accounts of the Company maintained with
respect to its business accurately and fairly reflect, in reasonable detail, the
transactions and its assets and liabilities with respect to its business. The
Company has not engaged in any transaction with respect to its business,
maintained any bank account for its business or used any of its funds in the
conduct of its business except for transactions, bank accounts and funds which
have been and are reflected in its normally maintained books and records.
Section 4.16 No Undisclosed Liabilities. There are no liabilities of
the Company and Subsidiaries other than (a) liabilities disclosed in the
Financial Statements or in the notes to the Financial Statements, (b)
liabilities which have arisen after December 31, 2003 in the Ordinary Course of
Business (none of which is a Liability for breach of contract, tort,
infringement claim or lawsuit) and (c) liabilities disclosed in Bankruptcy
Schedule and Statement of Financial Affairs included in Section 4.16 of the
Company Disclosure Schedule and which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on the Company.
There are no asserted claims for indemnification by any Person against the
Company or any Subsidiary under any law or agreement or pursuant to its
organizational documents.
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Section 4.17 Employee Plans. (a) The Company Disclosure Schedule lists
each of the following plans, contracts, policies and arrangements which is or,
within six years prior to the date hereof, was sponsored, maintained or
contributed to by, or otherwise binding upon the Company or, in the case of an
"employee benefit plan" (as defined in Section 3(3) of ERISA), an ERISA
Affiliate for the benefit of any current or former employee, director or other
personnel (including any such plan, contract, policy or arrangement approved or
adopted before, but effective on or after, the date of this Agreement): (i) any
"employee benefit plan," as such term is defined in Section 3(3) of ERISA,
whether or not subject to the provisions of ERISA; (ii) any personnel policy;
and (iii) any other employment, consulting, collective bargaining, stock option,
stock bonus, stock purchase, phantom stock, employee stock ownership (including
investment credit or payroll stock ownership), incentive, bonus, profit-sharing,
thrift-sharing, deferred compensation, retirement, severance, vacation,
dependent care, employee assistance, welfare, fringe benefit, medical, dental,
sick leave, death benefit, golden parachute or other compensatory plan,
contract, policy or arrangement which is not an employee benefit plan as defined
in Section 3(3) of ERISA (each such plan, contract, policy and arrangement being
herein referred to as an "Employee Plan").
(b) With respect to each Employee Plan, the Company has delivered
to the Purchasers true and complete copies of (i) each contract, plan document,
policy statement, summary plan description and other written material governing
or describing the Employee Plan and/or any related funding arrangements
(including, without limitation, any related trust agreement or insurance company
contract) or, if there are no such written materials, a summary description of
the Employee Plan; and (ii), where applicable, (A) the last two annual reports
(5500 series) filed with the IRS or the Department of Labor; (B) the most recent
balance sheet and financial statement; (C) the most recent actuarial report or
valuation statement; and (D) the most recent determination letter issued by the
IRS, as well as any other determination letter, private letter ruling, opinion
letter or prohibited transaction exemption issued by the IRS or the Department
of Labor within the last six years and any application therefor which is
currently pending.
(c) Each Employee Plan has been maintained and administered in all
material respects in accordance with its terms and in compliance with the
provisions of applicable law, including, without limitation, applicable
disclosure, reporting, funding and fiduciary requirements imposed by ERISA
and/or the Code. All contributions, insurance premiums, benefits and other
payments required to be made to or under each Employee Plan have been made
timely and in accordance with the governing documents and applicable law and
have been reflected on the Financial Statements in accordance with GAAP. With
respect to each Employee Plan, (i) no application, proceeding or other matter is
pending before the IRS, the Department of Labor, the PBGC or any other
governmental agency; (ii) no action, suit, proceeding or claim (other than
routine claims for benefits) is pending or, to the Knowledge of the Company,
threatened; and (iii) no facts exist which could reasonably be expected to give
rise to an action, suit, proceeding or claim which, if asserted, could result
reasonably be expected to result in a material Liability or expense to the
Company or the plan assets.
23
(d) With respect to each Employee Plan which is an "employee
benefit plan" within the meaning of Section 3(3) of ERISA or which is a "plan"
within the meaning of Section 4975(e) of the Code, there has occurred no
non-exempt transaction which is prohibited by Section 406 of ERISA or which
constitutes a "prohibited transaction" under Section 4975(c) of the Code.
(e) The Company Disclosure Schedule identifies each funded
Employee Plan which is an employee pension plan within the meaning of Section
3(2) of ERISA. With respect to each such Employee Plan, (i) the Employee Plan is
a qualified plan under Section 401(a) or 403(a) of the Code, and its related
trust is exempt from Federal income taxation under Section 501(a) of the Code;
(ii) a favorable IRS determination letter is currently in effect and, since the
date of the last determination letter, the Employee Plan has not been amended or
operated in a manner which would adversely affect its qualified status and no
event has occurred which has caused or could cause the loss of such status;
(iii) there has been no termination or partial termination within the meaning of
Section 411(d)(3) of the Code; (iv) with respect to each such Employee Plan
which is covered by Section 412 of the Code, there has been no accumulated
funding deficiency, whether or not waived, within the meaning of Section
302(a)(2) of ERISA or Section 412 of the Code, and there has been no failure to
make a required installment by its due date under Section 412(m) of the Code;
and (v) no event or set of conditions exists which would subject the assets of
the Company to a Lien under Section 412 of the Code or under ERISA.
(f) No Employee Plan is a multiemployer plan within the meaning of
Section 3(37) of ERISA or is subject to Title IV of ERISA. Neither the Company
nor any ERISA Affiliate is, or within six years prior to the date hereof was,
obligated to contribute or otherwise a party to any such multiemployer plan.
Neither the Company nor any ERISA Affiliate has incurred or expects to incur any
Liability under Title IV of ERISA (either as a contributing employer or as part
of a controlled group which includes a contributing employer).
(g) Except as may be required under Section 4980(B) of the Code or
any similar state law requiring continuation coverage with respect to health
plans, the Company does not maintain or contribute to, and is not obligated
under, any plan, contract, policy or arrangement providing health or death
benefits (whether or not insured) to current or former employees or other
personnel beyond the termination of their employment or other services. Each
Employee Plan by its terms may be unilaterally terminated and/or amended by the
Company at any time.
(h) The consummation of the transactions contemplated by this
Agreement will not (either alone or in conjunction with another event, such as a
termination of employment or other services) entitle any employee or other
person to receive severance or other compensation which would not otherwise be
payable absent the consummation of the transactions contemplated by this
Agreement or cause the acceleration of the time of payment or vesting of any
award or entitlement under any Employee Plan.
Section 4.18 Insurance Policies. The Company Disclosure Schedule
contains a correct and complete list of all insurance policies of the Company
covering the Company and its business, employees, agents and assets. Each such
policy is in full force and effect. The Company has no Knowledge of any
24
threatened termination of, or material premium increase with respect to, any of
such policies. Neither the Company nor any Subsidiary has failed to give any
notice or present any claim thereunder in due and timely fashion. There are no
pending claims against such insurance by the Company or any Subsidiary as to
which the insurers have denied coverage or otherwise reserved rights. Neither
the Company nor any Subsidiary has been refused any insurance with respect to
assets or operations, nor has its coverage been limited, by any insurance
carrier to which it has applied for any such insurance with which it has carried
insurance since January 1, 1998. The Company Disclosure Schedule sets forth a
list of all claims under any insurance policy in excess of $50,000 by occurrence
filed by or on behalf of the Company since January 1, 2001.
Section 4.19 No Illegal or Improper Transactions. Neither the Company,
any Subsidiary nor any of its officers, directors, employees, agents or
Affiliates has offered, paid or agreed to pay to any person or entity (including
any governmental official) or solicited, received or agreed to receive from any
such person or entity, directly or indirectly, any money or anything of value
for the purpose or with the intent of (a) obtaining or maintaining business, (b)
facilitating the purchase or sale of any product or service, or (c) avoiding the
imposition of any fine or penalty, in any such case in any manner which is in
violation of any applicable ordinance, regulation or law; and there have been no
false or fictitious entries made in the books or records of the Company and
Subsidiaries.
Section 4.20 Bank Accounts. Section 4.20 of the Company Disclosure
Schedule sets forth a complete and correct list of each bank and brokerage firm
in which the Company or the Subsidiaries have an account or safe deposit box,
the number of each such account or box and the names of all persons authorized
to draw thereon or to have access thereto.
Section 4.21 Environmental and Safety Requirements. The Company is in
material compliance with all applicable Environmental and Safety Requirements
(as defined below), and possesses all required permits, licenses and
certificates, and has filed all notices or applications, required thereby. The
Company has not received any notice or other communication from any party with
respect to the failure by the Company to comply with Environmental and Safety
Requirements. For purposes of this Agreement, "Environmental and Safety
Requirements" means all federal, foreign and local laws, bylaws, rules,
regulations, ordinances, decrees, orders, statutes, actions, guidelines,
standards, arrangements, injunctions, policies and requirements relating to
public health and safety, worker health and safety, pollution and protection of
the environment (including without limitation the handling of any polluted,
toxic or hazardous materials), all as amended or hereafter amended. The Company
has no, nor are its properties subject to, nor are there any facts or
circumstances which the Company reasonably believes could form the basis for any
Liability, contingent or otherwise, arising out of any Environmental and Safety
Requirements. The Company does not have in its possession or under its control
any hazardous substances.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
25
Except as specifically set forth in the disclosure schedule prepared
and signed by the Purchasers (the "Purchaser Disclosure Schedule") and delivered
to the Company simultaneously with the execution and delivery hereof, each
Purchaser, severally and not jointly, hereby represents and warrants solely as
to itself to the Company that all of the statements contained in this Article V
are true and correct as of the date of this Agreement (or, if made as of a
specified date, as of such date).
Section 5.1 Organization. Such Purchaser is a corporation or other
legal entity duly organized, validly existing and (in the jurisdictions
recognizing the concept) in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate or other power and
authority to own, lease and operate its properties and to conduct its business
as it is now being conducted.
Section 5.2 Due Authorization. (a) Such Purchaser has all right, power
and authority to execute and deliver this Agreement and the other Transaction
Documents to which it is a party, to consummate the transactions contemplated
hereby and thereby and to comply with the terms, conditions and provisions
hereof applicable to the Purchaser.
(b) The execution, delivery and performance by such Purchaser of
this Agreement and each of the other Transaction Documents to which it is a
party, the compliance by the Purchaser with each of the provisions of this
Agreement and each of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby, are within the power and authority
of such Purchaser, have been duly authorized and approved by the requisite
actions of the Purchaser and do not require any further authorization or consent
of the Purchaser. This Agreement is the legal, valid and binding agreement of
the Purchaser, enforceable against the Purchaser in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws from time to time
affecting the enforcement of creditors' rights generally.
Section 5.3 Financial Advisory Fees. No agent, broker, investment bank
or other financial advisor is or will be entitled to any fee, commission,
expense or other amount from such Purchaser in connection with any of the
transactions contemplated by this Agreement or the other Transaction Documents.
Section 5.4 Investment Representations.
(a) Such Purchaser understands that the Securities have not been
registered under the Securities Act, and that the certificates and instruments
representing the Securities will bear restricted legends.
(b) Such Purchaser has substantial experience in evaluating and
investing in private placement transactions of Securities so that it is capable
of evaluating the merits and risks of its investment in the Reorganized Company
and has the capacity to protect its own interests.
(c) Such Purchaser is acquiring the Securities for its own
accounts for investment only, and not with a view towards their distribution.
26
(d) Such Purchaser represents that it is an accredited investor
within the meaning of Regulation D under the Securities Act.
(e) Such Purchaser acknowledges and agrees that it shall hold the
Securities indefinitely unless the Securities are subsequently registered under
the Securities Act or an exemption from such registration is available and the
Securities are sold or otherwise transferred or otherwise disposed of in
accordance therewith. The Purchaser is aware of the provisions of Rule 144
promulgated under the Securities Act as in effect from time to time.
(f) Such Purchase has read the risk factors set forth on Exhibit F
attached hereto and understands the risks that are associated with investing in
the Reorganized Company.
ARTICLE VI
COVENANTS
Section 6.1 Conduct of Business Pending the Closing. Except as
otherwise expressly contemplated by this Agreement and the Plan or any of the
other Transaction Documents or as consented to by the Purchasers in writing or
as required by the Bankruptcy Code, during the period from the date of this
Agreement through and including the Closing Date, the Company shall, and shall
cause each of its Subsidiaries to, conduct its operations and business in the
Ordinary Course of Business. Without limiting the generality of the foregoing,
the Company shall not, and shall not permit any of its Subsidiaries to:
(a) amend the Plan without the prior written consent of the
Purchasers;
(b) amend its charter, bylaws or other comparable organizational
documents other than in accordance with this Agreement or amend or waive any
provisions of the Transaction Documents;
(c) acquire any "business," as defined in Rule 3-05(a)(2) of
Regulation S-X (whether by merger, consolidation, purchase of assets or
otherwise) or acquire any, or increase any existing, equity interest in any
person not a Subsidiary (whether through a purchase of stock, establishment of a
joint venture or otherwise), except in connection with the disposition of any
item referenced in Section 6.1(d) of the Company Disclosure Schedule;
(d) assume or reject any material executory Contract without the
prior approval of the Purchasers;
(e) other than the items set forth in Section 6.1(d) of the
Company Disclosure Schedule, (i) sell, exchange, license or otherwise dispose of
any of its real properties or other material assets, (ii) enter into any new
joint ventures or similar projects, (iii) enter into any new licenses, leases or
other material agreements or understandings other than in the Ordinary Course of
Business or (iv) mortgage any of its real properties or other assets; provided
that nothing set forth in this Section 6.1(d) shall prevent the Company from
entering into licenses, leases or subleases for which the Company is the
licensor, lessor or sublessor, respectively;
27
(f) except as set forth in Section 6.1(e) of the Company
Disclosure Schedule, change its methods of accounting, except as required by
changes in GAAP; or change any of its methods of reporting income and deductions
for federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ended December 31, 2003, and
except for future amendments of those tax returns to correct immaterial mistakes
or as required by changes in law or regulation or as may be required in
connection with the Chapter 11 Case;
(g) (i) incur any additional indebtedness, except as permitted by
the ▇▇▇▇▇▇▇▇ Cash Collateral Agreement, or (ii) make any loans, advances or
capital contributions to, or investments in, any Person (excluding any
Subsidiary), except as permitted by the ▇▇▇▇▇▇▇▇ Cash Collateral Agreement;
(h) except as set forth on Section 6.1(g) of the Company
Disclosure Schedule, (i) terminate the employment of any executive officer of
the Company other than for cause, or (ii) except pursuant to agreements in
effect on the date hereof (A) enter into any new employment agreement with any
existing director or executive officer without the consent of the Purchasers,
which consent shall not be unreasonably withheld, (B) grant to any current or
former director or executive officer of the Company or its Subsidiaries any
increase in compensation, bonus or other benefits (other than increases in base
salary in the Ordinary Course of Business or arising due to a promotion or other
change in status and consistent with generally applicable compensation
practices), (C) grant to any such current or former director, executive officer
or other employee any increase in severance or termination pay, (D) amend, adopt
or terminate any employment, deferred compensation, severance, termination or
indemnification agreement with any such current or former director, executive
officer or employee, or (E) amend, adopt or terminate any employee benefit plan,
except as may be required to retain qualification of any such plan under Section
401(a) of the Code;
(i) enter into any new agreement or amend any existing agreement
containing a non-competition, geographical restriction or similar covenant, in
each case in a manner materially adverse to the Purchasers or the Reorganized
Company; or
(j) agree to take any of the foregoing actions.
Section 6.2 No Solicitation of Alternative Proposals. (a) The Company
represents and warrants that it has terminated, and caused its Subsidiaries and
affiliates, and their respective officers, directors, employees, investment
bankers, attorneys, accountants and other advisors or representatives to
terminate, any discussions or negotiations relating to, or that could reasonably
be expected to lead to, any Alternative Proposal. Except as permitted by this
Agreement, the Company shall not, and shall not authorize or permit any
Subsidiary or any of its or their respective officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any Subsidiary to, directly or
indirectly, (i) solicit, initiate or encourage (including by way of furnishing
28
non-public information), or take any other action to facilitate, any inquiries,
discussions or the making of any proposal that constitutes, or could reasonably
be expected to lead to, an Alternative Proposal, (ii) participate in any
discussions or negotiations, or otherwise communicate in any way with any person
regarding an Alternative Proposal or (iii) enter into any agreement, arrangement
or understanding regarding an Alternative Proposal or requiring it to abandon,
terminate or fail to consummate the transactions contemplated hereby. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding sentence by any officer, director or employee of the
Company or any Subsidiary or any investment banker, financial advisor, attorney,
accountant or other representative retained by the Company or any Subsidiary
shall be deemed to be a breach of this Section 6.2 by the Company.
Notwithstanding the foregoing, at any time prior to the Closing Date, in
response to an unsolicited Superior Proposal that did not result from a breach
of this Section 6.2, the Company may (x) furnish non-public information with
respect to the Company and Subsidiaries to the person who made such Superior
Proposal pursuant to a customary confidentiality agreement and (y) participate
in discussions or negotiations with such person regarding such Superior
Proposal, if the Board of Directors determines in good faith (based on the
advice of its outside legal counsel) that failing to take such action would
constitute a breach of its fiduciary duties under applicable law.
(b) The Board of Directors shall not (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the Purchasers, its
approval or recommendation of this Agreement, (ii) approve or recommend, or
propose to approve or recommend, any Alternative Proposal, (iii) approve or
recommend, or propose to approve or recommend, or execute or enter into a letter
of intent, agreement in principle, definitive agreement or other agreement
relating to an Alternative Proposal (other than a confidentiality agreement
described in the last sentence of Section 6.2(a) hereof), or (iv) resolve to do
any of the foregoing. Notwithstanding the foregoing, the Board of Directors may
withdraw or modify, in a manner adverse to the Purchasers, its approval or
recommendation of this Agreement if, in response to a Superior Proposal that has
not been withdrawn and that did not otherwise result from a breach of this
Section 6.2, the Board of Directors shall have determined in good faith (based
on advice of its outside legal counsel) that failing to take such action would
constitute a breach of its fiduciary duties under applicable law; provided,
however, that prior to taking any such action, the Company shall have given the
Purchasers at least forty-eight (48) hours written notice of the Board of
Directors' intention to take such action and the opportunity to meet with the
Company, its financial advisors and its legal counsel.
(c) The Company shall promptly (and in any event within 24 hours)
advise the Purchasers orally and in writing of any Alternative Proposal
(including any amendments or proposed amendments thereof), or any request or
inquiry received by the Company or any Subsidiary with respect to, or that could
reasonably be expected to lead to, an Alternative Proposal, including, in each
case, the identity of the person making any such Alternative Proposal, request
or inquiry and the terms and conditions thereof, and shall provide to the
Purchasers any written materials received by the Company or any Subsidiary in
connection therewith. The Company shall keep the Purchasers fully informed of
the status of the discussions related to such Alternative Proposal, request or
inquiry, including, without limitation, by promptly (and in any event within 12
hours) providing the Purchasers with all written materials that it receives in
connection with any such Alternative Proposal. The Company agrees not to release
any person from, or waive any provisions of, any confidentiality or standstill
agreement to which the Company is a party.
29
(d) Notwithstanding any other provision of this Agreement, the
Company agrees that it will not (i) enter into any definitive agreement, letter
of intent or agreement in principle relating to an Alternative Proposal unless
such definitive agreement, letter of intent or agreement in principle shall
provide for an obligation by the Company to pay the Break-up Fee and Expense
Reimbursement Fee, not theretofore paid to the Purchasers pursuant to and in
accordance with Section 8.2 or (ii) consummate any Alternative Proposal unless
there shall be paid the Break-up Fee and Expense Reimbursement Fee, not
theretofore paid to the Purchasers, pursuant to and in accordance with Section
8.2.
Section 6.3 Cooperation; Access to Information. (a) From the date
hereof through the earlier of termination hereof and the Effective Date of the
Plan, the Company shall, and shall cause each of its Subsidiaries and, to the
extent any other Person is controlled directly or indirectly by the Company,
each such other Person to, give the Purchasers and their respective agents,
attorneys, accountants, and representatives, reasonable, access, during normal
business hours upon reasonable notice, to the books, contracts, records and
other documents, and personnel of the Company, its Subsidiaries and such other
Persons.
(b) From the date hereof through the earlier of termination hereof
and the Effective Date of the Plan, the Company shall use its best efforts to
cause its independent certified public accountants to afford the Purchasers and
their respective agents, attorneys, accountants, and representatives, reasonable
access to the audit work papers and other records of each such firm relating to
the Company and its Subsidiaries, subject to the Purchasers executing any
agreement reasonably required by the certified public accountants of the Company
or its Subsidiaries.
(c) Between the entry of an order of the Bankruptcy Court
approving the Break-up Fee and this Agreement and the earlier of termination
hereof and the Effective Date of the Plan:
(i) The Company's senior management shall meet with the
Purchaser's representatives weekly (or as otherwise reasonably requested by the
Purchaser) to inform the Purchasers of pending or proposed transactions
(including claim resolutions) involving the Company, its Subsidiaries or any
other Person controlled by the Company which could have a material effect on the
assets or liabilities of the Company, any of its Subsidiaries or any such
controlled Person.
(ii) The Company shall serve copies of all pleadings it
files in the Chapter 11 Case upon the Purchaser.
(d) The Purchasers shall, and shall cause each of their respective
agents, attorneys, accountants, and representatives to keep strictly
confidential all nonpublic, confidential and/or proprietary information
provided, or caused to be provided, by the Company pursuant to this Section 6.3
("Company Confidential Information"); provided, however, that the Purchasers
shall not be required to keep confidential any information that (i) (A) was
30
previously available to it on a non-confidential basis, (B) was at the time of
its disclosure, or thereafter became, generally available to the public other
than as a result of a disclosure by the Purchasers or any of its respective
agents, attorneys, accountants, and representatives, (C) was available to the
Purchasers on a non-confidential basis from a source other than the Company or
its representatives, provided that such source was not in breach of any
obligation of confidentiality to the Company or (D) has been independently
acquired or developed by the Purchasers without the use of, and is not derived
from, any Company Confidential Information or (ii) is required to be disclosed
pursuant to applicable Law.
Section 6.4 Further Actions: Reasonable Efforts. Without waiving any
right to terminate this Agreement under Section 8.1, upon the terms and subject
to the conditions hereof, the Company agrees to use its commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by the Transaction Documents, including without limitation (i) the
obtaining of all Governmental Requirements, (ii) the defending of any lawsuits
or other legal proceedings, whether judicial or administrative, challenging any
of the Transaction Documents or the consummation of the transactions
contemplated thereby, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity or any
restraint vacated or reversed, and (iii) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated by,
and to fully carry out the purposes of, the Transaction Documents.
Section 6.5 Use of Proceeds. The proceeds received by the Reorganized
Company in respect of the First Purchase Price shall be used by the Reorganized
Company as stated on Schedule 6.5(a) attached hereto and the proceeds received
by the Reorganized Company in respect of the Second Purchase Price shall be used
by the Reorganized Company as stated on Schedule 6.5(b) attached hereto.
Section 6.6 Restructuring; Bankruptcy Court Approval. The Company
shall, and shall cause each of its Subsidiaries to, in coordination with the
Purchasers, use its best efforts to restructure the capitalization of the
Company and its Subsidiaries pursuant to the Plan (the "Restructuring"). Without
limiting the foregoing, within five business days of the signing of this
Agreement, the Company shall seek to obtain an order of the Bankruptcy Court
approving the Break-up Fee and this Agreement. As promptly as practicable
thereafter, the Company shall (i) file the Plan and related Disclosure
Statement, the material provisions of which Disclosure Statement shall be in
form and substance reasonably acceptable to the Purchasers, with the Bankruptcy
Court within fourteen (14) days from the date hereof, (ii) seek to obtain an
order of the Bankruptcy Court approving the Disclosure Statement (the
"Disclosure Statement Approval Order") within thirty (30) days from the date
hereof, (iii) accept certain executory Contracts and reject other executory
Contracts as directed by the Purchasers and (vi) seek to obtain the Confirmation
Order with respect to the Plan which shall provide, among other things, (x) that
the issue and sale of the New Common Shares pursuant to this Agreement or to be
otherwise outstanding or subject to issuance upon completion of the
Restructuring shall at the time of their issuance be duly authorized and validly
issued and outstanding, fully paid and nonassessable, and free and clear of any
Encumbrances of any kind and (y) an express finding that the Purchaser has acted
in good faith in connection with the Chapter 11 Case, the Plan and the
Restructuring.
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Section 6.7 Registration Rights Agreement. Effective as of the Closing,
the Reorganized Company shall enter into the Registration Rights Agreement, in
form attached hereto as Exhibit G (the "Registration Rights Agreement"), for the
benefit of the Purchasers.
Section 6.8 Compliance with Securities Law. Except as set forth in
Section 4.8 of the Company Disclosure Schedule, prior to the Closing, the
Company shall file all reports required to be filed by it as a "public company"
under the Securities Act and the Exchange Act in a timely manner and update the
information contained in its registration statement(s) registering its common
stock and in its SEC Reports on a continuous basis. After the Closing, the
Reorganized Company shall file all reports required to be filed by a "public
company" under the Securities Act and the Exchange Act on a timely and
continuous basis.
Section 6.9 Corporate Governance. Pursuant to the Plan, immediately
prior to the Closing, the Company shall cause the resignation of each member of
the Board of Directors. The Board of Directors of the Reorganized Company shall
consist of five members. One member of senior management of the Reorganized
Company will serve on the initial Board of Directors of the Reorganized Company,
as designated in the Plan. The other board members shall consist of (i) three
directors selected by the Purchasers, at least one of whom shall not be an
officer or employee of the Purchasers or a family member of any of the foregoing
and (ii) one independent director; provided that the Board of Directors,
collectively, including any required committee thereof, shall comply with any
other qualification, experience and independence requirements under applicable
Law, including the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 and the rules then in effect of
the stock exchange or quotation system (including the benefit of any transition
periods available under applicable Law) on which shares of the common stock of
the Reorganized Company are listed or are anticipated to be listed, when such
shares are listed following the Closing.
Section 6.10 Releases. The Company shall use its best efforts to ensure
that the Plan and Confirmation Order shall provide, among other things, that the
directors, officers, advisors, attorneys, investment bankers and agents of the
Purchasers and each of their respective Affiliates, members, managers,
stockholders, partners, representatives, employees, attorneys and agents are
fully, completely and unconditionally released from any and all claims related
to the Company, its Subsidiaries and Affiliates, its business, its governance,
its securities disclosure practices, or the Restructuring.
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Section 6.11 Purchaser Preemptive Rights.
(a) Subject to Subsection 6.11(b) below, if the Reorganized
Company issues any shares of Common Stock or any securities containing options
or rights to acquire any shares of Common Stock or any securities convertible or
exchangeable for Common Stock, in each case after the date hereof, the Company
will offer to sell to each Purchaser a number of such securities ("Offered
Shares") so that the ownership percentage of the Purchaser immediately after the
issuance of such securities (and assuming the purchase of such Offered Shares)
would be equal to the ownership percentage for the Purchaser immediately prior
to such issuance of securities. The Reorganized Company shall give each
Purchaser at least thirty (30) days prior written notice of any proposed
issuance, which notice shall disclose in reasonable detail the proposed terms
and conditions of such issuance (the "Issuance Notice"). The Purchasers shall be
entitled to purchase such securities at the same price, on the same terms
(including, if more than one type of security is issued, the same proportionate
mix of such securities), and at the same time as the securities are issued by
delivery of irrevocable written notice to the Reorganized Company of such
election within thirty (30) days after delivery of the Issuance Notice (the
"Election Notice"). If any Purchaser has elected to purchase any Offered Shares,
the sale of such shares shall be consummated as soon as practical (but in any
event within fifteen (15) days) after the delivery of the Election Notice.
(b) The provisions of Section 6.11(a) shall not apply to any issue
or sale of equity securities of the Company to (i) employees, consultants,
members of management or directors of the Company, pursuant to and in accordance
with the Management Option Plan as in effect on the date hereof, (ii)
independent third parties in connection with any strategic alliances or mergers
and acquisitions approved by each of the directors designated by the Purchasers,
(iii) holders of the Warrants upon exercise of the Warrants, (iv) the holders of
the Notes upon conversion of the Notes, or (v) the unsecured creditors of the
Company pursuant to the Restructuring.
Section 6.12 Notification of Certain Matters. From the date hereof
through the Closing, each party hereto shall give prompt notice to the other
parties hereto of the occurrence, or failure to occur, of any event the
occurrence or failure of which shall have caused any of such party's
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect or of any condition not satisfied for
purposes of satisfying the conditions set forth in Section 7.1 hereof; provided,
however, that no such notification shall be deemed for any purpose under this
Agreement to permit such party to alter or amend such party's representations
and warranties contained herein.
Section 6.13 Management Options/New Capitalization. Upon entry of the
Confirmation Order, the Board of Directors of the Company shall adopt a
management option plan (the "Management Option Plan") under which up to 4% of
the outstanding common stock of the Company may be granted.
Section 6.14 Affirmative Covenants. For so long as any of the Notes
remain outstanding, the Reorganized Company shall, and shall cause each
Subsidiary to:
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(a) cause all properties owned by the Reorganized Company or used
or held for use in the conduct of its business to be maintained and kept in good
condition, repair and working order (reasonable wear and tear excepted) and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Board of Directors may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, that the foregoing shall not prevent the Reorganized
Company from discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the management of the Reorganized Company,
desirable in the conduct of its business and is not disadvantageous in any
material respect to the holders of the Notes;
(b) preserve and keep in full force and effect the corporate
existence, rights (charter and statutory), licenses and franchises of the
Reorganized Company; provided, that the Reorganized Company shall not be
required to preserve any such right, license or franchise if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Reorganized Company as a whole and that
the loss thereof is not disadvantageous in any material respect to the holders
of the Notes;
(c) maintain the books, accounts and records of the Reorganized
Company in accordance with past custom and practice as used in the preparation
of the Financial Statements except to the extent permitted or required by GAAP;
(d) keep all of its properties which are of an insurable nature
insured with insurers, believed by the Reorganized Company in good faith to be
financially sound and responsible, against loss or damage to the extent that
property of similar character is usually so insured by corporations similarly
situated and owning like properties, unless a failure to insure could not
reasonably be expected to have a Material Adverse Effect as determined in the
good faith judgment of the Board;
(e) comply with all material legal requirements and material
contractual obligations applicable to the operations and business of the
Reorganized Company and its Subsidiaries and pay all applicable Taxes as they
become due and payable;
(f) deliver Conversion Shares in accordance with the terms and
conditions, and time periods, set forth in the Notes and the Warrants; and
(g) maintain the officers and directors liability insurance at
reasonable commercial rates with coverage of at least $3.0 million.
Section 6.15 Required Approvals. For so long as any of the Notes
purchased hereunder remain outstanding, without the prior written consent of the
Purchasers, the Reorganized Company shall not:
(a) use the proceeds from the sale of the Notes other than as
permitted under Section 6.5 hereof;
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(b) enter into any transaction or series of transactions with any
stockholder, director, officer, employee or Affiliate which would require
disclosure pursuant to Rule 404 of Regulation S-K under the Securities Act;
(c) authorize, create or issue any securities (or any rights or
securities directly or indirectly convertible into or exercisable or
exchangeable for securities) having rights, preferences or privileges superior
to or on a parity with that of the Notes;
(d) directly or indirectly declare or pay any dividends or make
any distributions upon any of its capital stock or other equity securities (or
any securities directly or indirectly convertible into or exercisable or
exchangeable for equity securities);
(e) directly or indirectly redeem, purchase or otherwise acquire
any of the Reorganized Company's capital stock or other equity securities
(including, without limitation, warrants, options and other rights to acquire
such capital stock or other equity securities) or directly or indirectly redeem,
purchase or make any payments with respect to any stock appreciation rights,
phantom stock plans or similar rights or plans, other than the redemption set
forth in the Notes;
(f) merge or consolidate with any Person;
(g) sell, lease or otherwise dispose of more than 10% of the
assets of the Reorganized Company (computed on the basis of book value,
determined in accordance with GAAP consistently applied, or fair market value,
determined by the Board of Directors in its reasonable good faith judgment) in
any transaction or series of related transactions (other than sales of inventory
in the ordinary course of business) or sell or permanently dispose of any of its
Intellectual Property;
(h) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction;
(i) acquire any interest in any company or business (whether by a
purchase of assets, purchase of stock, merger or otherwise), enter into any
joint venture or make any investments with an aggregate valuation in excess of
$100,000 outstanding at any time;
(j) become subject to (including, without limitation, by way of
amendment to or modification of) any agreement or instrument which by its terms
would (under any circumstances) restrict the Reorganized Company's right to
perform the provisions of the this Agreement or any other Transaction Documents
contemplated thereby;
(k) create, incur, assume or suffer to exist any Indebtedness
other than the Indebtedness evidenced by the Notes issued hereunder;
(l) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, any Liens other than
Permitted Liens;
35
(m) amend, alter or repeal the Reorganized Company's Bylaws or
Certificate of Incorporation as to increase the number of authorized shares of
the Common Stock or any series of preferred stock or to materially affect the
preferences, special rights or other powers of the Conversion Shares;
(n) increase the authorized number of directors constituting the
Board of Directors above five (5) directors;
(o) materially alter or change the business of the Reorganized
Company; or
(p) do any act or omit to do any act which would result in
taxation of any holder of Notes, Warrants or Conversion Shares under Section 305
of the Code.
Section 6.16 Audited 2003 Financial Statements. The Company shall
deliver to the Purchasers true, correct and complete copies of the audited 2003
Financial Statements as soon as practicable, but no later than September 30,
2004.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to the Purchaser's Obligations. The obligation
of the Purchasers to consummate the transactions contemplated hereby with
respect to the Investment shall be subject to the satisfaction at or prior to
the Closing of each of the following conditions.
(a) No Injunction. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction (each, a "Restraint") preventing consummation of any of the
transactions contemplated hereby shall be in effect.
(b) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
as of the Closing Date as though made on the Closing Date (or, if made as of a
specified date as of such date), and the Purchasers shall have received a
certificate to such effect signed on the Closing Date on behalf of the Company
by its respective Chief Executive Officer and Chief Financial Officer.
(c) Performance of Obligations. The Company shall have performed
all obligations required to be performed by them under this Agreement at or
prior to the Closing and the Company shall have delivered to the Purchasers at
the Closing a certificate signed by its Chief Executive Officer and Chief
Financial Officer, dated the Closing Date, in form and substance reasonably
satisfactory to the Purchasers, to the foregoing effect provided, however, that
such signatories shall have no personal Liability as a result of signing such
certificate.
(d) Transaction Documents. Each of the parties to the Transaction
Documents (other than the Purchaser) shall have executed and delivered to the
Purchasers, in form and substance reasonably acceptable to the Purchasers, the
36
applicable Transaction Documents and such Transaction Documents shall constitute
the legal, valid and binding obligation of the Reorganized Company (or other
Reorganized Company, as the case may be).
(e) Plan. The Effective Date of the Plan shall have occurred.
(f) Discharge of Debts. Except as otherwise provided in the Plan,
in accordance with Section 1141(d) of the Bankruptcy Code, the Company and the
Reorganized Company shall receive a discharge of its debt. Except as otherwise
provided in the Plan, in accordance with Section 1141(b) of the Bankruptcy Code,
all property of the Company shall vest and revest in the Reorganized Company
free and clear of all Liens, Claims, Encumbrances and interest.
(g) Chapter 11 Case. The Plan, in form and substance satisfactory
to the Purchasers, shall have been approved by the Bankruptcy Court pursuant to
the Confirmation Order and shall have an Effective Date no later than June 30,
2004.
(h) Organizational Documents. The Amended Certificate of
Incorporation and amended Bylaws of the Company in the forms attached hereto as
Exhibits H and I shall have been adopted, the Amended Certificate of
Incorporation shall have been filed with and accepted by the Secretary of State
of State of Delaware and such Certificate of Incorporation and amended Bylaws
shall be in full force and effect.
(i) Assumption/Rejection of Executory Contracts. The Company has
assumed the executory Contacts set forth on Exhibit J hereto and rejected other
Contracts as directed by the Purchaser.
Section 7.2 Conditions to the Obligations of the Company. The
obligation of the Company to consummate the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Closing of each of the
following conditions:
(a) No Injunction. No Restraint preventing consummation of any of
the transactions contemplated hereby shall be in effect.
(b) Plan. All conditions precedent to the effectiveness of the
Plan (other than those relating the Closing hereunder) shall have been satisfied
or waived.
(c) Representations and Warranties. The representations and
warranties of the Purchasers set forth in this Agreement shall be true and
correct as of the Closing Date as though made on the Closing Date (or, if made
as of a specified date, as of such date) except to the extent that all such
failures of such representations and warranties to be true and correct shall not
have a material adverse effect on the ability of the Purchasers, taken together,
to consummate the transactions contemplated hereby.
(d) Performance of Obligations. The Purchasers shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing.
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ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date notwithstanding the fact that any requisite authorization and
approval of the transactions contemplated hereby shall have been received and no
party hereto shall have any Liability to any other party hereto as a result of
its invoking its rights to terminate this Agreement pursuant to this Section
(provided that any such termination shall not relieve any party from Liability
for a breach of any provision hereof prior to such termination nor shall it
terminate the Company's obligations under this Article VIII nor eliminate the
Liability of the Purchaser):
(a) by the mutual written consent of the Purchasers and the
Company;
(b) by the Purchasers if: (i) there shall be any Law that makes
consummation of the purchase of the New Common Shares hereunder illegal or
otherwise prohibited or if any court of competent jurisdiction or Governmental
Entity shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the purchase of the New Common
Shares hereunder and such order, decree, ruling or other action shall have
become final and non-appealable, (ii) if a trustee or an examiner is appointed
in the Chapter 11 Case, (iii) if the Chapter 11 Case is converted into a case
under Chapter 7 of the Bankruptcy code or (iv) if the Chapter 11 Case is
dismissed;
(c) by the Purchasers, (i) if the Board of Directors withdraws or
changes its recommendation of this Agreement in a manner materially adverse to
the Purchasers, (ii) if the Board of Directors recommends an Alternative
Proposal or (iii) if the Company enters into a written agreement or letter of
intent or agreement in principle providing for any Alternative Proposal;
(d) (i) by the Purchasers, if the Company shall be in breach of
its obligations hereunder such that the conditions to the obligations of the
Purchasers set forth in Section 7.1 will not be satisfied at or prior to the
Closing, and such failure cannot be or has not been cured within twenty (20)
Business Days after the giving of written notice to the Company; and (ii) by the
Company, if the Purchasers shall be in breach of their obligations hereunder
such that the conditions to the obligations of the Company set forth in Section
7.2 will not be satisfied at or prior to the Closing, and such failure cannot be
or has not been cured within twenty (20) Business Days after the giving of
written notice to the Purchasers;
(e) by the Purchasers, if (i) the Plan is not filed with the
Bankruptcy Court within fourteen (14) days from the date hereof, (ii) entry of
this Agreement by the Company is not approved by the Bankruptcy Court within
thirty (30) days from the date hereof, (iii) the Disclosure Statement is not
filed with the Bankruptcy Court within fourteen (14) days from the date hereof,
(iv) the Disclosure Statement Approval Order has not been entered within thirty
(30) days from the date hereof, in form and substance reasonably acceptable to
the Purchasers, (v) the Confirmation Order has not been entered on or prior to
June 30, 2004, in form and substance reasonably acceptable to the Purchasers or
(vi) the Closing has not occurred by July 13, 2004; or
38
(f) by the Company, if (i) the Board of Directors determines in
good faith that termination of this Agreement is necessary in order for the
Company to accept any Alternative Proposal, or (ii) the Bankruptcy Court has
ordered the Company to terminate this Agreement in order to accept any
Alternative Proposal; provided that the Company shall have the right to
terminate this Agreement pursuant to clause (i) above only if it has complied in
all material respects with the provisions of Section 6.2(a), and shall
acknowledge its obligation to comply with the requirements of Section 8.2
relating to any required payment (including the timing of any payment) of the
Break-up Fee.
Section 8.2 Break-up Fee and Expense Reimbursement Fee. If the Company
terminates this Agreement pursuant to Clauses (b), (c), (d)(i), (e) or (f) of
Section 8.1 hereof, then the Company will immediately (but in any event within
three business days after the Purchasers receive notice of termination) pay to
the Purchasers (pro rata based on their individual Purchase Price) a termination
fee equal to $75,000 in cash (the "Break-Up Fee") plus the aggregate amount of
actual expenses incurred by the Purchaser in connection with the transaction
described in this Agreement (the "Expense Reimbursement Fee").
ARTICLE IX
SECURITY
Section 9.1 Security Interest. (a) As security for the payment and
performance of all of the Obligations, Borrower hereby grants to the Purchasers
a first-priority lien and continuing security interest in, and pledges and
assigns to the Purchasers, the Collateral, subject only to the security interest
of The ▇▇▇▇▇▇▇▇ Group and the security interest of Zions First National Bank in
the Bridgeview Financial Residual Payment Account. The Purchaser's security
interest shall continually exist until (a) all Obligations (other than
Obligations with respect to the Warrants) have been paid in full, and (b) there
exists no commitment by the Purchasers which could give rise to any Obligations
(other than Obligations with respect to the Warrants), whether or not all
Obligations shall at any time or from time to time be reduced to zero. Borrower
shall make notations on its books and records disclosing the existence of the
Purchaser's security interest in the Collateral. The Purchasers shall have no
liability or duty, either before or after the occurrence of an Event of Default
hereunder, on account of loss of or damage to, or to collect or enforce any of
its rights against, the Collateral, or to preserve any rights against account
debtors or other parties with prior interests in the Collateral, the sole duty
of the Purchasers in this regard being to exercise reasonable care with respect
to tangible Collateral in its actual possession.
(b) All proceeds received by the Purchasers upon any realization
upon any Collateral shall be applied (i) first, to pay the costs of collection,
(ii) second, to the payment of all amounts of principal and accrued interest
which constitute Obligations, (iii) third, to all other Obligations then owing
to the Purchasers; and (iv) fourth, the balance, if any, shall be returned to
Borrower or such other persons as are entitled thereto.
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Section 9.2 Covenants and Representations Concerning Collateral. With
respect to all of the Collateral, Borrower covenants, warrants and represents
that:
(a) No financing statement covering any of the Collateral is on
file in any public office or land or financing records except for financing
statements in favor of the Purchaser. The Purchasers are the legal and
beneficial owners of all of the Collateral, free and clear of all Liens, except
for Permitted Liens.
(b) Borrower will maintain the Collateral in good order and
condition, ordinary wear and tear excepted, and will use, operate and maintain
the Collateral in compliance with all laws, regulations and ordinances and in
compliance with all applicable insurance requirements and regulations. Borrower
will promptly notify the Purchasers in writing of any litigation involving or
affecting the Collateral which Borrower knows or has reason to believe is
pending or threatened. Borrower will promptly pay when due all taxes and all
transportation, storage, warehousing and other such charges and fees affecting
or arising out of or relating to the Collateral (other than Liens constituting
Permitted Liens) and shall defend the Collateral, at Borrower's expense, against
all claims and demands of any persons claiming any interest in the Collateral
adverse to Borrower or the Purchasers, except in respect of Permitted Liens.
(c) At all reasonable times the agents and designees of the
Purchasers may enter the business premises and any other premises of Borrower
and inspect the Collateral and all books and records of Borrower (in whatever
form); provided, however, that, in the absence of a continuing Default or Event
of Default, the Purchasers shall give Borrower reasonable notice of its intent
to so enter the business premises and inspect the books and records. Except in
connection with transactions in the ordinary course of Borrower's business,
Borrower agrees (i) not to sell or assign its interest in, or grant any license
under, the Intellectual Property, without the prior written consent of the
Purchasers, (ii) to notify the Purchasers promptly following the acquisition of
new Intellectual Property, and (iii) to provide the Purchasers, at least
annually, with a certificate of an officer of Borrower disclosing all material
transactions concerning the Intellectual Property, including, without
limitation, assignments, licenses and sublicenses, and new Intellectual Property
acquired.
(d) Borrower will maintain comprehensive casualty insurance on the
Collateral against such risks, in such amounts, with such loss deductible
amounts and with such companies as may be satisfactory to the Purchasers, and
each such policy shall contain a clause or endorsement satisfactory to the
Purchasers naming the Purchasers as mortgagees and a clause or endorsement
satisfactory to the Purchasers that such policy may not be cancelled or altered
and the Purchasers may not be removed as mortgagee without at least 30 days
prior written notice to the Purchasers. In all events, the amounts of such
insurance coverage shall conform to prudent business practices and shall be in
such minimum amounts that Borrower will not be deemed a coinsurer under
applicable insurance laws, regulations, policies or practices. Subject to the
rights of the Existing Lien Holders, Borrower hereby (i) assigns to the
Purchasers and grants to the Purchasers a security interest in any and all
proceeds of such policies, (ii) authorizes and empowers the Purchasers to adjust
or compromise any loss under such policies and to collect and receive all such
proceeds, (iii) authorizes and directs each insurance company to pay all such
proceeds directly and solely to the Purchasers and not to Borrower and the
Purchasers jointly and (iv) authorizes and empowers the Purchasers to execute
and endorse in Borrower's name all proofs of loss, drafts, checks and any other
40
documents or instruments necessary to accomplish such collection, and any
persons making payments to the Purchasers under the terms of this paragraph are
hereby relieved absolutely from any obligation or responsibility to see to the
application of any sums so paid. After deduction from any such proceeds of all
costs and expenses (including reasonable attorney's fees) incurred by the
Purchasers in the collection and handling of such proceeds, the net proceeds may
be applied, at the option of the Purchasers, either toward replacing or
restoring the Collateral, in a manner and on terms satisfactory to the
Purchasers, or as a credit against such of the Obligations, whether matured or
unmatured, as the Purchasers shall determine.
(e) All books and records pertaining to the Collateral are located
at the business premises and Borrower will not change the location of such books
and records without the prior written consent of the Purchasers; provided,
however, that books, records and other Collateral may from time to time be
located other than at the business premises provided that prior thereto (i)
Borrower shall have executed and delivered to the Purchasers such financing
statements and other documents as the Purchasers may require in order to create,
perfect or preserve the security interest of the Purchasers therein or the
rights of the Purchasers with respect thereto, and (ii) the person(s) in
possession of and/or controlling access to such Collateral shall have entered
into an agreement in form and substance acceptable to the Purchasers permitting
access thereto at any time upon reasonable prior notice and agreeing to turn
over such Collateral to the Purchasers upon request of the Purchasers following
the occurrence of an Event of Default.
(f) Except for (i) any vehicles of Borrower, (ii) Collateral in
transit to Borrower or to customers of Borrower, and (iii) mobile goods of a
type normally used in more than one jurisdiction, all of the Collateral is, and,
unless Borrower shall give the Purchasers not less than thirty (30) days prior
written notice of a change in location, shall remain located at the business
premises.
(g) Borrower shall do, make, execute and deliver all such
additional and further acts, things, deeds, assurances, instruments and
documents as the Purchasers may request to vest in and assure to the Purchasers
their respective rights hereunder or in any of the Collateral, including,
without limitation, (i) cooperating with the Purchasers in obtaining control
with respect to Collateral consisting of deposit accounts, investment property,
letter-of-credit rights and electronic chattel paper, and (ii) the execution and
delivery of financing statements, financing statement amendments and/or
continuation statements, assignments of trademarks and powers of attorney in
connection therewith, and Borrower agrees to pay all taxes, fees and costs
(including reasonable attorney's fees) paid or incurred by the Purchasers in
connection with the preparation and filing or recordation thereof. Borrower
hereby expressly authorizes the Purchasers to file in such jurisdictions as the
Purchasers shall determine any and all initial financing statements and
amendments thereto which the Purchasers may from time to time deem necessary or
advisable to further evidence or perfect the Purchaser's security interests in
the Collateral. Borrower shall not file any amendment, correction statement or
termination statement with respect to any filed financing statement which names
the Purchasers as secured parties without the prior written consent of the
Purchaser.
41
(h) A carbon, photographic or other reproduction of this Agreement
or any financing statement signed by Borrower in connection with this Agreement
shall be sufficient as a financing statement.
(i) Borrower (i) will not create any chattel paper without placing
a legend thereon acceptable to the Purchasers indicating the Purchasers have a
security interest therein, and (ii) shall, whenever required by the Purchasers,
promptly deliver to the Purchasers, with all endorsements and/or assignments
required by the Purchasers, all instruments, chattel paper, guaranties and the
like received by Borrower constituting, evidencing or relating to any of the
Collateral or proceeds of any of the Collateral.
(j) If any Receivable arises out of a contract with the United
States of America or any State, county, municipality or any department, agency
or instrumentality thereof, Borrower shall immediately notify the Purchasers
thereof and, if required by the Purchasers, execute and deliver any agreements,
notices and/or assignments and do such other things as may be satisfactory to
the Purchasers in order that all sums due and to become due to Borrower under
such contract shall be duly assigned to the Purchasers in accordance with the
Federal Assignment of Claims Act (31 United States Code ss. 1203; 41 United
States Code ss. 15) and/or any other applicable federal, State and local laws
and regulations relating to the assignment of governmental obligations.
(k) Borrower agrees that until the Obligations shall have been
satisfied in full and this Agreement shall have been terminated, Borrower will
not, without the prior written consent of the Purchasers, (i) consign any
Collateral to any consignee, (ii) store or place any Collateral with any
warehouseman, artisan, processor, contractor or bailee, or (iii) enter into any
agreement (for example, a license agreement) which is inconsistent with
Borrower's obligations under this Agreement. Borrower further agrees that it
will not take any action, or permit any action to be taken by others subject to
its control, including licensees, or fail to take any action, which would
materially adversely affect the validity or enforcement of the rights
transferred to the Purchasers under this Agreement.
(l) The Copyrights, Patents, Trademarks and Licenses listed on
Schedule 9. 2(l) constitute all of the Copyrights, Patents, Trademarks and
Licenses registered or filed in the United States and now owned by Borrower. If,
before the Obligations shall have been satisfied in full, Borrower shall (i)
obtain rights to any new patentable inventions, copyrights, trademarks,
trademark registrations, tradenames or licenses, or (ii) become entitled to the
benefit of any patent, copyright or trademark application, trademark, trademark
registration, or license renewal, or apply for any reissue, division,
continuation, certificate of reexamination, renewal, extension or
continuation-in-part of any Patent or improvement on any Patent (whether in the
United States or in any foreign country or jurisdiction), the security interest
of the Purchasers granted hereunder shall automatically attach thereto and
Borrower shall give to the Purchasers prompt written notice thereof.
42
ARTICLE X
EVENT OF DEFAULT
Section 10.1 Event of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) Any material written representation or information set forth
herein or in the Transaction Documents shall prove to have been, when made or
supplied, false or misleading in any material respect.
(b) Failure of Borrower to pay any of the Obligations, including,
without limitation, any sum due the Purchasers under this Agreement or any of
the other Transaction Documents, when and as the same shall become due, whether
at the due date thereof, by demand, by acceleration or otherwise, and such
failure continues for thirty (30) days following written notice of such default
from the Purchaser.
(c) Occurrence of a material default or event of default by
Borrower or any Subsidiary with respect to, or acceleration or demand for
payment prior to maturity of, any Indebtedness of Borrower or any Subsidiary to
any person, or with respect to any Lien securing any Indebtedness of Borrower or
any Subsidiary to any person, which default continues beyond any applicable
notice and cure period.
(d) Failure of Borrower or any Subsidiary to observe or perform
any warranty, covenant, condition or agreement to be observed or performed by
Borrower or such other person under this Agreement or any of the other
Transaction Documents, and such failure continues for thirty (30) days following
written notice of such default from the Purchaser.
(e) Borrower or any Subsidiary shall:
(i) make a general assignment for the benefit of creditors,
whether conditional or unconditional and whether or not such assignment is filed
in court and whether or not any court assumes jurisdiction thereof,
(ii) commence a case under or otherwise seek to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law, statute or proceeding (other than the Borrower's
current Chapter 11 case), or
(iii) by any act indicate its consent to, approval of or
acquiescence in any such proceeding or the appointment of any receiver of or
trustee for Borrower or any Subsidiary or a substantial part of its property, or
suffer any such receivership, trusteeship or proceeding to continue undismissed
for a period of 60 days.
(f) Borrower or any Subsidiary shall become a debtor in any case
under any chapter of the Bankruptcy Code; provided, however, that if such case
was not commenced by, consented to, approved by or acquiesced in by Borrower, no
Event of Default shall exist unless such case remains undismissed sixty (60)
days from the commencement thereof.
43
(g) Dissolution of, or entry of any order, judgment, award or
decree for the dissolution of, Borrower or any Subsidiary.
(h) Entry of any unstayed judgment, order, award or decree against
Borrower, or any Subsidiary which is uninsured to a material extent, or which
the Purchasers determine in good faith, when aggregated with all other
judgments, orders, awards and decrees outstanding against Borrower and
Subsidiaries, could have a material adverse effect on the business, assets,
operations, business prospects or financial condition of Borrower or any
Subsidiary, or on any rights of the Purchasers with respect to any of the
Collateral or any of the Obligations, or on the prospect for full and punctual
payment and performance of all of the Obligations.
(i) Injunction or restraint of Borrower or any Subsidiary in any
manner from conducting its business in whole or in part deemed material by the
Purchaser in good faith.
(j) Any assets of Borrower or any Subsidiary material to the
operation of the business of Borrower or such Subsidiary shall be attached,
levied upon, seized or repossessed or come into the possession of a trustee,
receiver or other custodian.
(k) Suspension or revocation of any material license, permit,
certification, approval or the like required to be held by Borrower or any
Subsidiary that is not an individual by federal, State, local or foreign laws.
(l) Occurrence of any default or event of default under or as
defined in any of the Transaction Documents, which continues beyond any
applicable cure period set forth therein.
(m) Borrower or any other person shall revoke or terminate, or
attempt to revoke or terminate, or notify the Purchasers of revocation or
termination of, any continuing obligations or agreements of Borrower or such
other person relating in any way to any of the Obligations, including, without
limitation, any continuing obligations or agreements of Borrower or such other
person under any guaranty or subordination agreement.
ARTICLE XI
RIGHTS AND REMEDIES
Section 11.1 Rights and Remedies of the Purchaser. Upon the occurrence
of an Event of Default described in Sections 10.1(e), 10.1(f) or 10.1(g) of this
Agreement, all of the Obligations shall automatically and immediately be due and
payable. Upon and after the occurrence of an Event of Default, the Purchasers
may, without notice or demand, on behalf of the Purchasers exercise in any
jurisdiction in which enforcement hereof is sought the following rights and
remedies, in addition to the rights and remedies available to the Purchasers
44
under the Transaction Documents, the rights and remedies of a secured party
under the UCC and all other rights and remedies available to the Purchasers
under applicable law, all such rights and remedies being cumulative and
enforceable alternatively, successively or concurrently:
(a) Declare the Notes, all interest accrued and unpaid thereon and
all other Obligations to be immediately due and payable and the same shall
thereupon become immediately due and payable without presentment, demand for
payment, protest or notice of any kind, all of which are hereby expressly
waived.
(b) Enforce the Liens granted to the Purchasers hereunder by
instituting any proceedings, collecting or liquidating all or any part of the
Collateral or selling, assigning, leasing, renting, licensing or otherwise
disposing of all or any part of the Collateral or any interest therein, in one
or more parcels, at the same or different times, at public or private sale or
disposition, or otherwise.
(c) Indorse Borrower's name on any promissory notes or other
instruments, acceptances, checks, drafts, money orders or other items of payment
constituting Collateral, or collections or other proceeds of Collateral, that
may come into the Purchaser's possession or control from time to time.
(d) Terminate, or cease extending credit under, any or all
outstanding commitments or credit accommodations of the Purchasers to Borrower
or any Subsidiary.
(e) Sign Borrower's name on any invoices to, drafts against and
other notices and documents to account debtors or other obligors of Borrower and
requests for verification of accounts and other amounts which may be due to
Borrower.
(f) Execute proofs of claim and loss on behalf of Borrower.
(g) Apply all Collateral and proceeds of Collateral delivered to
the Purchasers or coming into the Purchasers' possession or control from time to
time to any of the Obligations, or hold the same as security for any contingent
or future Obligations.
(h) At Borrower's expense, continue or complete, or cause to be
continued or completed, performance of Borrower's obligations under any
contracts of Borrower.
(i) Use, operate, manage, control and exercise all rights of
Borrower relating to, the Collateral and any other assets of Borrower, and
collect all income and revenues therefrom.
(j) Take exclusive possession of any or all of the Collateral from
time to time and/or place a custodian in exclusive possession of any or all of
the Collateral from time to time and, so far as Borrower may give authority
therefor, enter upon any premises on which any of the Collateral may be situated
and remove the same therefrom, Borrower hereby waiving, to the maximum extent
permitted by law, any and all rights to prior notice and to judicial hearing
with respect to repossession of Collateral, and/or require Borrower, at
Borrower's expense, to assemble and deliver any or all of the Collateral to such
place or places as the Purchasers may reasonably request.
45
(k) With respect to any accounts, notes, instruments, chattel
paper, tax refunds, contract rights, general intangibles or other debts or
liabilities payable to Borrower securing the Obligations, notify any account
debtors and other obligors thereon to make payments thereon directly to the
Purchasers jointly, take control of the cash and noncash proceeds thereof,
demand, collect, ▇▇▇ for and receive any money or property at any time due,
payable or receivable on account thereof, compromise and settle with any person
liable thereon, and extend the time of payment or otherwise change the terms
thereof, without incurring liability or responsibility therefor to Borrower.
(l) ▇▇▇ in the Purchaser's name to enforce the Intellectual
Property, and any licenses thereunder, and, if the Purchasers shall commence any
such suit, Borrower shall, at the request of the Purchasers, do any and all
lawful acts and execute any and all proper documents required by the Purchasers
in aid of such enforcement and Borrower shall promptly, upon demand, reimburse
and indemnify the Purchasers for all costs and expenses incurred by the
Purchasers in the exercise of their rights hereunder.
(m) Endorse Borrower's name on all applications, documents, papers
and instruments deemed necessary or desirable by the Purchasers in the use of
the Intellectual Property; take any other actions with respect to the
Intellectual Property as the Purchasers deem in the best interest of the
Purchasers; grant or issue exclusive or non-exclusive licenses under the
Intellectual Property to any person; and assign, pledge, convey or otherwise
transfer title in or dispose of the Intellectual Property to any person.
Section 11.2 Disposition of Collateral. Purchaser agree to give
Borrower at least ten days prior written notice of the time and place of any
public disposition of Collateral or of the time after which any private
disposition or any other intended disposition is to be made. All sales or other
dispositions of Collateral may be made for cash, upon credit or for future
delivery. In no event shall Borrower be credited with any part of the proceeds
of liquidation, sale or other disposition of any Collateral until final payment
thereon has been received by the Purchasers in immediately available funds, and
the Purchasers shall have no obligation to delay any liquidation, sale or other
disposition because the same may result in the imposition of any forfeiture,
premium or penalty. Without limitation of the foregoing, the Purchasers may:
(a) comply with applicable state or federal law requirements in
connection with the disposition of Collateral, and
(b) sell Collateral without giving any warranties with respect
thereto (the Purchasers being specifically permitted to disclaim any warranties
of title and the like in connection therewith), and neither such compliance or
sale without warranties will be considered adversely to affect the commercial
reasonableness of any sale of Collateral.
Section 11.3 Costs and Expenses. Borrower agrees to pay to the
Purchasers, upon written demand by the Purchasers from time to time, the amount
of all expenses, including reasonable attorneys' fees and expenses, paid or
46
incurred by the Purchasers (a) in exercising or enforcing any of their rights
hereunder, under the other Transaction Documents or under law, or (b) in
defending any and all non-meritorious or previously waived demands, claims,
counterclaims, cross-claims, causes of action, litigation and proceedings of
every kind and nature asserted, commenced or instituted against the Purchasers
by Borrower or any Subsidiary on account of, as a result of or relating to, any
action taken or not taken by the Purchasers in connection with the Notes, any
other of the Obligations, the Collateral or enforcement or exercise by the
Purchasers of any rights or remedies of the Purchasers under this Agreement,
under any of the other Transaction Documents or under law. Borrower also agrees
to pay to the Purchasers, upon written demand by the Purchasers from time to
time, interest on the outstanding amount of such expenses paid by the
Purchasers, from the date of the Purchasers' demand for payment of such expenses
until the same are paid in full, at the highest rate and calculated in the
manner provided in the Notes.
Section 11.4 Applications of Collateral. Except as may be otherwise
specifically provided in this Agreement, all Collateral and proceeds of
Collateral coming into the Purchaser's possession may be applied by the
Purchasers to any of the Obligations, whether matured or unmatured, as the
Purchasers shall determine in its sole discretion.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the internal and substantive Laws of the State of
Delaware without giving effect to conflicts of law principles thereof.
Section 12.2 Jurisdiction; Forum; Service of Process; Waiver of Jury
Trial. With respect to any suit, action or proceeding ("Proceeding") arising out
of or relating to this Agreement each of the Company and the Purchasers hereby
irrevocably:
(a) (i) for so long as the Chapter 11 Case is pending, submits to
the exclusive jurisdiction of the Bankruptcy Court and any appellate court from
any such court (the "Selected Courts") for any Proceeding arising out of or
relating to this Agreement or the other Transaction Documents and the
transactions contemplated hereby and thereby (and agrees not to commence any
Proceeding relating hereto or thereto except in such courts) and waives any
objection to venue being laid in the Selected Courts whether based on the
grounds of forum non conveniens or otherwise; and (ii) thereafter, submits to
the exclusive jurisdiction of the State and Federal court in New York;
(b) consents to service of process in any Proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, or
by recognized international express carrier or delivery service, to the Company
or the Purchasers at their respective addresses referred to in Section 9.5
hereof; provided, however, that nothing herein shall affect the right of any
party hereto to serve process in any other manner permitted by law; and
47
(c) waives, to the fullest extent permitted by law, any right it
may have to a trial by jury in any Proceeding directly, or indirectly arising
out of, under or in connection with this Agreement or the other Transaction
Documents.
Section 12.3 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors by operation of law and permitted assigns of the parties
hereto. No assignment of this Agreement may be made by any party at anytime,
whether or not by operation of law, without the other party's prior written
consent; provided, however, that, the Purchasers shall be permitted to assign
their respective rights and obligations under this Agreement to any of their
Affiliates, without the consent of the Company. Only the parties to this
Agreement or their permitted assigns shall have rights under this Agreement.
Section 12.4 Entire Agreement; Amendment. This Agreement (including the
Exhibits and Schedules attached hereto) and the other Transaction Documents
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and supersedes all prior agreements relating
to the subject matter hereof. Except as expressly provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the Company and by the Purchaser.
No waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof. The Company and the Purchasers
acknowledge and agree that nothing herein shall prohibit the Purchasers from
acquiring any claims against the Company or any interest in such claims. After
the Effective Date, in the event that any terms of this Agreement conflict with
any terms of the Plan, the terms of the Plan shall control; provided, however,
to the extent any provision of the Plan relating to the Purchasers conflicts
with any provision of this Agreement, the provisions of this Agreement shall
control.
Section 12.5 Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other party:
if to the Company:
Avalon Digital Marketing Systems, Inc.
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: President & Chief Executive Officer
48
with a copy to:
Durham ▇▇▇▇▇ & ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
and
if to the Purchasers,:
at the address specified for each Purchaser
on the signature pages hereto
with a copy to:
Fulbright & ▇▇▇▇▇▇▇▇ L.L.P.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
All such notices, requests, consents and other communications shall be deemed to
have been given or made if and when delivered personally or by overnight courier
to the parties at the above addresses or sent by electronic transmission, with
confirmation received, to the telecopy numbers specified above (or at such other
address or telecopy number for a party as shall be specified by like notice).
Section 12.6 Delays or Omissions. Except as expressly provided herein,
no delay or omission to exercise any right, power or remedy accruing to the
Company or the Purchasers upon any breach or default of any party under this
Agreement, shall impair any such right, power or remedy of the Company or the
Purchasers nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of the Company or the Purchasers of any breach or default under this
Agreement, or any waiver on the part of any such party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to the Company or the Purchasers
shall be cumulative and not alternative.
Section 12.7 Further Assurances. Borrower agrees promptly to do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, instruments and documents as the Purchasers may reasonably request
in good faith to vest in and assure to the Purchasers their respective rights
hereunder or under any of the other Transaction Documents or in any of the
Collateral.
49
Section 12.8 Counterparts. This Agreement may be executed in any number
of counterparts, each of which may be executed by only one of the parties
hereto, each of which shall be enforceable against the party actually executing
such counterpart, and all of which together shall constitute one instrument.
Section 12.9 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provisions; provided, however, that no such severability
shall be effective if it materially changes the economic benefit of this
Agreement to any party.
Section 12.10 Headings. The table of contents and headings used in this
Agreement are used for convenience only, do not constitute a part of this
Agreement and are not to be considered in construing or interpreting this
Agreement.
Section 12.11 No Public Announcement. The parties agree that the
initial press release to be issued with respect to the transactions contemplated
by the Transaction Documents shall be in a form mutually agreed to by the
parties. Thereafter, except when required by applicable Law, neither the Company
nor any of the Purchasers shall make any press release, public announcements,
publicity statement or other public disclosure without the prior consent of the
other parties, which consent shall not be unreasonably withheld, as to the
timing of such disclosure, the extent of distribution and form and substance
thereof.
Section 12.12 Purchasers' Agent. (a) Each Purchaser hereby constitutes
and appoints Networks Direct, Inc. as agent (the "Purchasers' Agent") for and on
behalf of the Purchasers to give and receive notices and communications and to
give consents and approvals under this Agreement. Such agency may be changed by
a Purchaser or Purchasers holding a majority of the Conversion Shares held by
all of the Purchasers from time to time upon not less than ten days' prior
written notice to the Company. In the event of a vacancy in such agency, a
successor Purchasers' Agent shall be elected by the Purchasers holding a
majority of the Conversion Shares then held by all of the Purchasers within two
weeks of such vacancy. Any successor Purchasers' Agent shall deliver to the
Purchasers and the Company a written instrument accepting such appointment, and
thereupon it shall succeed to all rights and duties of the Purchasers' Agent. No
bond shall be required of the Purchasers' Agent, and the Purchasers' Agent shall
receive no compensation for its services. Notices or communications to or from
the Purchasers' Agent shall constitute notice to or from the Purchasers.
(b) The Purchasers' Agent shall not be liable for any act done or
omitted hereunder as Purchasers' Agent while acting in good faith and in the
exercise of reasonable judgment and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith. Each
Purchaser hereby agrees to indemnify and hold harmless the Purchasers' Agent
against any loss, liability or expense incurred without gross negligence or bad
faith on the part of the Purchasers' Agent and arising out of or in connection
with the acceptance or administration of its duties under this Agreement, as the
same may be modified, amended or supplemented.
50
(c) Unless otherwise notified in writing by a Purchaser or
Purchasers holding a majority of the Conversion Shares held by all of the
Purchasers, the Company may rely on the Purchasers' Agent and shall be held
harmless for any action taken based on written instruction from Purchasers'
Agent in accordance with this Agreement and the other Transaction Documents.
Section 12.13 Exculpation Among Purchasers. Each Purchaser acknowledges
that it is not relying on any Person (including, without limitation, any other
Purchaser), other than the Company and its officers and directors, in making its
investment or decision to invest in the Company. Each Purchaser agrees that no
other Purchaser nor the respective controlling Person, officers, directors,
partners, agents or employees of any other Purchaser shall be liable to such
Purchaser for any losses incurred by such Purchaser in connection with its
investment in the Company. Furthermore, each Purchaser acknowledges that
Fulbright & ▇▇▇▇▇▇▇▇ L.L.P. has not acted as counsel to the Purchasers on
matters relating to the Purchaser's investment under this Agreement.
* * *
51
IN WITNESS WHEREOF, each of the undersigned has caused the foregoing
Agreement to be executed as of the date first above written.
COMPANY:
AVALON DIGITAL MARKETING SYSTEMS, INC.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
---------------------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President & Chief Executive
Officer
PURCHASERS:
AVALON ACQUISITION COMPANY, LLC
F
By: /s/▇▇▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------------------
Name:▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title: President
Address for Notice: ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: President and Chief Executive
Officer
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
NETWORKS DIRECT, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title: Chairman
Address for Notice: ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: President and Chief Executive
Officer
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
52
Exhibit A
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON ITS CONVERSION HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THIS NOTE AND SUCH SECURITIES UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
AVALON DIGITAL MARKETING SYSTEMS, INC.
SECURED CONVERTIBLE PROMISSORY NOTE
$__________ December 13, 2004
For value received, AVALON DIGITAL MARKETING SYSTEMS, INC., a Delaware
corporation ("Borrower"), hereby promises to pay to the order of AVALON
ACQUISITION COMPANY, LLC ("Lender") the principal sum of __________
($__________) together with interest in arrears from and including the date
hereof on the unpaid principal balance hereunder.
This Note is one of the several notes (collectively, the "Notes")
issued pursuant to a certain Note and Warrant Purchase and Security Agreement
(the "Purchase Agreement"), dated as of May 28, 2004, by and among Borrower and
the Purchasers named therein, a copy of which is on file at the principal office
of Borrower, and Lender, by its acceptance hereof, agrees to be bound by the
provisions and shall be entitled to the benefits of the Purchase Agreement, as
provided therein. Capitalized terms used herein and not otherwise defined shall
have the meaning as ascribed to them in the Purchase Agreement.
1. Payment upon Maturity. Unless converted as provided herein, this
Note shall automatically mature and all payments on account of principal shall
be due and payable on December 13, 2007 (the "Maturity Date") in lawful money of
the United States of America in immediately available funds, by wire transfer of
funds to the account or accounts designated in writing by the Lender or in such
other manner as the Lender may designate from time to time in writing to the
Company.
2. Acceleration. Notwithstanding the provisions of Section 1, if an
Event of Default shall occur, the Lender may declare the entire outstanding
principal amount of this Note, together with any accrued and unpaid interest
thereon and any other fees, costs and charges then payable under this Note or
the Purchase Agreement, immediately due and payable, whereupon the same shall
become immediately due and payable, without presentment, protest or further
demand or notice of any kind, all of which are expressly waived by the Borrower.
After the occurrence of an Event of Default until this Note is paid in full,
interest on the principal amount outstanding from time to time shall be payable
at a rate per annum equal to eight percent (8%).
1
3. No Prepayment. Borrower shall not have the option to prepay any
portion of the outstanding principal of this Note or the interest thereon.
4. Interest. Interest shall be calculated on the basis of actual number
of days elapsed over a year of 365/366 days at the rate of three percent (3.0%)
per annum (except that the rate will be increased to eight percent (8% upon an
Event of Default). Accrued interest on this Note shall be payable quarterly on
the last day of each three-month period beginning on December 13, 2004, until
the principal amount of this Note shall be paid in full; provided, that, all
interest then accrued and unpaid shall be due and payable on the Maturity Date.
The accrued interest will be paid in shares of Common Stock valued at the
Current Market Price (as defined below). For the purpose of any calculation made
pursuant to this Section, the "Current Market Price" at any date of one share of
Common Stock shall be deemed to be the average of the daily closing prices for
the 10 consecutive trading days ending on the trading day before such date (as
adjusted for any stock dividend, split, combination or reclassification that
took effect during such 10-trading day period). The closing price for each day
shall be the last reported sales price or, if no such reported sales took place
on such day, the average of the last reported bid and asked prices, in either
case on the principal national securities exchange on which the Common Stock is
listed or admitted to trading (or if the Common Stock is not at the time listed
or admitted for trading on any such exchange, then such price as shall be equal
to the average of the last reported bid and asked prices, as reported on Nasdaq
on such day, or if, on any such date, the security shall not be quoted on the
Nasdaq, then such price shall be equal to the average of the last reported bid
and asked prices on such day as reported by The National Quotation Bureau
Incorporated or any similar reputable quotation and reporting service, if such
quotation is not reported by The National Quotation Bureau Incorporated). In the
event the bid and asked prices of the Common Stock are not reported, then the
Current Market Price shall be determined by the Board of Directors, in its good
faith discretion.
5. Conversion of Note.
(a) Conversion. The holder of this Note may, at its option, at any
time, but prior to payment in full of the principal amount and accrued interest
of this Note, convert the unpaid principal amount of this Note in whole or in
part into shares of the Common Stock at a price per share initially equal to
$0.26 (the "Conversion Price") subject to adjustment set forth in Section 5(e)
below.
(b) Conversion Procedures. Upon a Conversion specified in Section
5(a), the holder of this Note shall surrender the Note at the office of Borrower
or of its transfer agent for the applicable number of shares of Common Stock and
deliver a conversion notice, which will indicate the amount of the unpaid
principal amount of the Note being converted (the "Conversion Amount").
Thereupon, there shall be issued and delivered to such holder the number of
shares of Common Stock, into which the Conversion Amount was convertible on the
date on which such conversion occurred. If the Note should be converted in part
only, the Borrower shall, upon surrender of the Note for a partial conversion,
execute and deliver a new Note evidencing the remaining principal amount of the
Note after such partial conversion.
(c) Cash in Lieu of Fractional Shares. No fractional share or
interest of any shares of Common Stock or scrip representing fractional shares
or interests, shall be issued upon any conversion of the Note. Instead of any
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fractional shares or interest of Common Stock, which would otherwise be issuable
upon any conversion of the Note, Borrower shall pay to the holder of such Note a
cash adjustment in respect of such fraction in an amount equal to the same
fraction of the price per share at which the Note converted into such Common
Stock under this Section 5.
(d) Cancellation of Note. Upon the conversion of the entire
principal amount of this Note pursuant to this Section 5 and payment of the
accrued interest thereon, this Note shall be canceled.
(e) Adjustment to Conversion Price. If Borrower shall, at any time
this Note remains outstanding, effect a subdivision of its shares of Common
Stock into a greater number of such shares or a combination of such shares into
a lesser number of shares, whether by forward or reverse stock split, stock
dividend (payable in shares of Common Stock) or otherwise, the Conversion Price
shall forthwith be proportionately increased or reduced, as the case may be, to
reflect the effectuation of such subdivision or combination. Any adjustment
under this paragraph shall become effective at the close of business on the date
the subdivision or combination becomes effective, or as of the record date of
such dividend, or in the event that no record date is fixed, upon the making of
such dividend.
If any reclassification, capital reorganization, or change in the
Common Stock of Borrower (other than as a result of a subdivision, combination,
or stock dividend provided for in the preceding paragraph and other than as a
result of a Change of Control (as hereinafter defined)) is contemplated at any
time this Note remains outstanding, then, as a condition of such
reclassification, reorganization, or change, lawful provision shall be made, and
duly executed documents evidencing the same from Borrower or its successor shall
be delivered to Lender, so that Lender shall have the right at any time this
Note remains outstanding, to convert this Note into the kind and amount of
shares of stock and other securities and property receivable in connection with
such reclassification, reorganization, or change by a holder of the same number
of shares of Common Stock as the number of Conversion Shares that Lender could
have obtained by converting this Note immediately prior to such
reclassification, reorganization, or change. In any such case appropriate
provisions shall be made with respect to the rights and interests of Lender so
that the provisions hereof shall thereafter be applicable with respect to any
shares of stock or other securities and property deliverable upon conversion of
this Note, and appropriate adjustments shall be made to the Conversion Price
hereunder.
Whenever the Conversion Price shall be adjusted as required by the
provisions of the preceding two paragraphs, Borrower shall forthwith deliver
written notice setting forth the adjusted Conversion Price to Lender, but
failure to receive such notice, or any defects therein, or in the delivery
thereof, shall not affect such adjustment in the Conversion Price.
6. Change of Control.
(a) Redemption of Note Upon Change in Control. If this Note
remains outstanding upon a Change in Control of Borrower, then the holder of
this Note may accelerate the Maturity Date of the Note such that Borrower shall
pay to the Lender simultaneously with the closing of such Change in Control all
outstanding principal amount and any accrued interest on this Note (a
"Redemption").
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(b) Change in Control Defined. The term Change in Control shall
include, but not limited to, any sale, transfer or other disposition of all or
substantially all of the assets of Borrower, any reorganization, consolidation
or merger of Borrower with or into any other entity or entities which results in
the exchange of outstanding shares of Borrower for securities or other
consideration paid, or caused to be paid, by any such entity whereby the holders
of Borrower's securities before the transaction beneficially own less than 50%
of the outstanding equity securities of the surviving entity after the
transaction or a sale of 50% or more of the Company's equity securities by the
holders thereof in a single transaction; provided, that any exercise of all or
some of the Warrants and sale of all or some of the shares received thereupon by
the holders and/or conversion of all or some of the Notes and sale of all or
some of the shares received thereupon by the holders resulting in a change of
ownership of 50% or more of the Company's equity securities shall not be deemed
a Change of Control.
(c) Notice. Borrower shall give notice of any pending or proposed
Change in Control of Borrower to the Lender as soon as is practicable (but, in
any event, at least twenty days) prior to the closing of such Change in Control.
Such notice shall specify the anticipated date of such closing (the "Change in
Control Date") and set forth the material terms and conditions of such Change in
Control. The Lender shall give notice to Borrower within ten (10) days of its
receipt of such notice from Borrower of its election to exercise its Redemption
rights hereunder. Within ten (10) days of receipt of such notice of a Redemption
from the Lender, Borrower shall send notice to the Lender specifying, the date
of the closing of such Redemption (such date shall be immediately prior to the
Change in Control Date) and the amount of the principal and accrued interest due
under the Note to be paid to the Lender upon such Redemption.
(d) Cancellation of Note. Upon the redemption of the entire
principal amount of this Note and the accrued interest thereon pursuant to this
Section 6, this Note shall be canceled.
7. Security Interest. Pursuant to the terms of the Purchase Agreement
and subject to the security interests of The ▇▇▇▇▇▇▇▇ Group and Zions First
National Bank, Borrower has granted Lender a first-priority-security interest in
all of Borrower's assets of every nature and type whatsoever to secure the
payment of all of Borrower's indebtedness hereunder.
8. Event of Default. Upon the occurrence of any Event of Default
hereunder, the Lender may declare any or all obligations or liabilities of
Borrower to the Lender (including the unpaid principal hereunder and any
interest due thereon), immediately due and payable without presentment, demand,
protest or notice.
9. Expenses of Collection. If this Note is not paid in accordance with
its terms, Borrower shall pay to the Lender, in addition to principal and
accrued interest thereon, all costs of collection of the principal and accrued
interest, including, but not limited to, reasonable attorneys' fees, court costs
and other costs for the enforcement of payment of this Note.
4
10. Waiver by the Lender. No waiver of any obligation of Borrower under
this Note shall be effective unless it is in a writing signed by the Lender. A
waiver by the Lender of any right or remedy under this Note on any occasion
shall not be a bar to exercise of the same right or remedy on any subsequent
occasion or of any other right or remedy at any time.
11. Notice. All notices and other communications required or permitted
hereunder shall be in writing (or in the form of a facsimile (confirmed in
writing) to be given only during the recipient's normal business hours unless
arrangements have otherwise been made to receive such notice by facsimile
outside of normal business hours) and shall be mailed by registered or certified
mail or by a nationally recognized overnight courier, postage prepaid, or
otherwise delivered by hand, messenger, or facsimile (as provided above)
addressed (a) if to the Lender, at ▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇
▇▇▇▇▇, Attention: President, fax: (▇▇▇) ▇▇▇-▇▇▇▇ or at such other address or
facsimile number as such Lender or other holder of this Note shall have
furnished to Borrower in writing, or (b) if to Borrower, to Avalon Digital
Marketing Systems, Inc., ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇, ▇▇ ▇▇▇▇▇,
Attention: President, fax: (▇▇▇) ▇▇▇-▇▇▇▇ (or at such other address or facsimile
number as Borrower shall have furnished in writing to the holder of this Note).
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered, if
delivered personally, or, if sent by mail, at the earlier of its receipt or
seventy-two (72) hours after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid, or, if by nationally recognized overnight courier, the
following business day after it has been timely delivered to or deposited with
such courier, addressed and mailed as aforesaid, or, if by facsimile, pursuant
to the above, when received.
12. Waiver by Borrower. Borrower hereby expressly waives presentment,
demand, and protest, notice of demand, dishonor and nonpayment of this Note, and
all other notices or demands of any kind in connection with the delivery,
acceptance, performance, default or enforcement hereof, and hereby consents to
any delays, extensions of time, renewals, waivers or modifications that may be
granted or consented to by the holder hereof with respect to the time of payment
or any other provision hereof.
13. Severability. In the event any one or more of the provisions of
this Note shall for any reason be held to be invalid, illegal or unenforceable,
in whole or in part or in any respect, or in the event that any one or more of
the provisions of this Note operate or would prospectively operate to invalidate
this Note, then and in any such event, such provision(s) only shall be deemed
null and void and shall not affect any other provision of this Note and the
remaining provisions of this Note shall remain operative and in full force and
effect and in no way shall be affected, prejudiced, or disturbed thereby.
14. Governing Law. This Note is delivered in and shall be enforceable
in accordance with the laws of the State of Delaware, and shall be construed in
accordance therewith, and shall have the effect of a sealed instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned has caused this instrument to be
executed by its duly authorized officer as of the date first above written.
BORROWER:
AVALON DIGITAL MARKETING SYSTEMS, INC.
By:
----------------------------------------
Name:
Title:
6
Exhibit C
WARRANT CERTIFICATE NO. A - __
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE BEEN AND WILL BE ISSUED PURSUANT TO EXEMPTIONS FOR NONPUBLIC
OFFERINGS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, SUCH SECURITIES
MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL FOR
OR SATISFACTORY TO THE ISSUER, REGISTRATION UNDER THE APPLICABLE FEDERAL OR
STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH
REGISTRATION REQUIREMENTS.
Void after 5:00 p.m. Provo, Utah Time, on December 13, 2011
WARRANT TO PURCHASE __________ SHARES OF COMMON STOCK
OF
AVALON DIGITAL MARKETING SYSTEMS, INC.
This is to certify that, pursuant to a Note and Warrant Purchase and
Security Agreement dated as of May 28, 2004, by and among AVALON DIGITAL
MARKETING SYSTEMS, INC., a Delaware corporation (the "Company"), and the
Purchasers named therein (the "Note and Warrant Purchase Agreement"), the holder
of this Warrant ("Holder") or its registered assigns pursuant to Section 4
hereof is entitled to purchase, subject to the provisions of this Warrant, from
the Company, __________ fully paid, validly issued and nonassessable shares of
Common Stock, par value $.0001 per share, of the Company ("Common Stock"), at
the exercise price of $.0001 per share, until December 13, 2011. The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid for each share of Common Stock may also be adjusted from time
to time as described in Section 9 hereof. The shares of Common Stock deliverable
upon such exercise, and as adjusted from time to time, are hereinafter sometimes
referred to as "Warrant Shares," and the exercise price of a share of Common
Stock, as adjusted from time to time, is hereinafter sometimes referred to as
the "Exercise Price."
1. Exercise of Warrant; Notification of Expiration Date of Warrant.
This Warrant may be exercised at any time or from time to time until 5:00 P.M.
Provo, Utah time on December 13, 2011 (the "Expiration Date"), provided,
however, that if such day is a day on which banking institutions in the State of
Utah are authorized by law to close, then on the next succeeding day which shall
not be such a day.
(a) To exercise this Warrant in whole or in part, the Holder shall
deliver to the Company at its principal office, at any time and from time to
time during the term of this Warrant: (A) the notice of exercise in the form
attached hereto as Exhibit A, (B) cash, certified or official bank check payable
to the order of the Company or wire transfer of funds to the Company's account
(or any combination of the foregoing) in the amount of the Exercise Price for
each share being purchased, and (C) this Warrant.
1
(b) Notwithstanding any contrary provisions in this Warrant, at
any time during the term of this Warrant that the Current Market Price (as
defined in Section 1(c) below) exceeds the Exercise Price at the date of
calculation, instead of exercising this Warrant as described in Section 1(a)
above, the Holder may elect to convert all or any portion of this Warrant (to
the extent not previously exercised) into that number of shares of Common Stock
determined by reference to the formula set forth in this Section 1(b) by
delivering to the Company at its principal office, at any time and from time to
time during the term of this Warrant: (A) the notice of exercise in the form
attached hereto as Exhibit A, and (B) this Warrant, in which event the Company
shall issue to the Holder a number of shares of Common Stock calculated using
the following formula:
CS = WCS x (CMP-EP)
--------------
CMP
where CS = the number of shares of Common Stock issuable upon
the Holder's conversion of all or a portion of this
Warrant pursuant to this Section 1(b),
WCS = the number of shares of Common Stock as to which this
Warrant is exercisable as of the date this Warrant is
converted under this Section 1(b), or if this Warrant
is being converted under this Section 1(b) as to only
a portion of the total number of shares of Common
Stock as to which this Warrant is then exercisable,
such portion,
CMP = The Current Market Price at the date of such
calculation, and
EP = The Exercise Price of the Warrant Shares, as adjusted
to the date of such calculation.
(c) For the purpose of any calculation made pursuant to this
Section, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 10
consecutive trading days ending on the trading day before such date (as adjusted
for any stock dividend, split, combination or reclassification that took effect
during such 10-trading day period). The closing price for each day shall be the
last reported sale price or, if no reported sales took place on such day, the
average of the last reported bid and asked prices, in either case on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading (or if the Common Stock is not at the time listed or
admitted for trading on any such exchange, then such price as shall be equal to
the average of the last reported bid and asked prices, as reported on Nasdaq on
such day, or if, on any such date, the security shall not be quoted on the
Nasdaq, then such price shall be equal to the average of the last reported bid
and asked prices on such day as reported by The National Quotation Bureau
Incorporated or any similar reputable quotation and reporting service, if such
quotation is not reported by The National Quotation Bureau Incorporated).
As soon as practicable after each exercise of this Warrant, but not
later than seven (7) business days from the date of the exercise, the Company
shall issue and deliver to the Holder a certificate or certificates for the
2
Warrant Shares issued upon such exercise (or in the case of a cashless exercise
pursuant to a conversion under Section 1(b), the Common Stock into which the
Warrant Shares, or portion thereof as applicable, are convertible) issuable upon
such exercise (or conversion), registered in the name of the Holder or the
Holder's designee. If the Warrant is exercised or converted in part only, the
Company shall, upon surrender of the Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the Warrant Shares purchasable hereunder. Upon receipt by the
Company of the Warrant at its office, or by the stock transfer agent of the
Company at its office, in proper form for exercise, together with the exercise
price thereof and taxes as aforesaid in cash or certified or bank check and the
investment letter described below, the Holder shall be deemed to be the Holder
of record of the shares of Common Stock (or in the case of a cashless exercise,
the Common Stock into which the Warrant Shares are convertible) issuable upon
such exercise (or conversion), notwithstanding that the stock transfer books of
the Company shall then be closed or that certificates representing such shares
of Common Stock (or in the case of a cashless exercise, the Common Stock into
which the Warrant Shares are convertible) shall not then be physically delivered
to the Holder.
2. Reservation of Shares. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant that number of Warrant
Shares as shall be required for issuance and delivery upon exercise or
conversion of the Warrant.
3. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise or conversion of the
Warrant. With respect to any fraction of a share of Common Stock called for upon
any exercise or conversion hereof, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the fair value of a share of Common
Stock as of the exercise date.
4. Exchange, Transfer, Assignment or Loss of Warrant. The Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
Holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to Section 8 hereof, the Holder may
transfer or assign this Warrant, in whole or in part and from time to time. Upon
surrender of this Warrant to the Company at its principal office or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed (with signature guaranteed, if required by the Company or
its stock transfer agent) and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee or assignees named in such instrument of assignment and this
Warrant shall promptly be canceled. This Warrant may be divided by or combined
with other Warrants which carry the same rights upon presentation hereof at the
principal office of the Company or at the office of its stock transfer agent, if
any, together with a written notice specifying the names and denominations in
which new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in the case
of loss, theft or destruction, of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor, date and amount.
3
5. Sale of the Company.
(a) In the event of the sale or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding equity securities of the surviving entity after the transaction or a
sale of 50% or more of the Company's equity securities by the holders thereof in
a single transaction (an "Acquisition"), the Company shall provide written
notice to the Holder no less than 30 days prior to the date on which the
Acquisition is to take place. The notice shall contain a brief description of
the proposed action and shall state (x) the date on which the Acquisition is to
take place and (y) the date, if any is to be fixed, as of which the holders of
Common Stock or other securities shall receive cash or other property
deliverable upon the Acquisition.
(b) Upon the closing of any Acquisition, the successor entity
shall assume the obligations of this Warrant to the extent such obligations
remain after any such Acquisition, and this Warrant shall be exercisable for the
same securities, cash and property as would be payable for the shares issuable
upon the exercise of the unexercised portion of this Warrant as if such shares
were outstanding on the record date for the Acquisition and subsequent to
closing and the Exercise Price shall be adjusted in accordance with Section 9.
(c) Notwithstanding the foregoing, at the election of the Holder,
the Company shall purchase the unexercised portion of this Warrant for cash upon
the closing of any Acquisition in which the consideration is cash or cash
equivalents for an amount equal to (x) the fair market value of any
consideration that would have been received by the Holder in consideration of
the shares had the Holder exercised the unexercised portion of this Warrant
immediately prior to the record date for determining the shareholders entitled
to participate in the proceeds of the Acquisition, less (y) the aggregate
Exercise Price of the shares, but in no event less than zero.
6. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
7. Other Notices to Warrant Holder. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock of the Company (other than a distribution to which the
Holder is entitled as a stockholder of record thereof), or (ii) if the Company
shall offer to holders of Common Stock for subscription or purchase by them any
shares of any class or any other rights, or (iii) if any voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder or any holder of a Warrant executed and or
delivered pursuant to Section 1 or Section 4, at least 15 days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution of rights, or (y)
such dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such dissolution,
liquidation or winding up.
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8. Securities Law Compliance.
(a) The Holder of the Warrant, by acceptance hereof, acknowledges
that the Warrant and the Warrant Shares or other shares of Common Stock to be
issued upon exercise or conversion hereof are being acquired solely for the
Holder's own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell, transfer, assign or
otherwise dispose of this Warrant, any Warrant Shares or any shares of Common
Stock into which the Warrant Shares are convertible except under circumstances
that will not result in a violation of the Act or any state securities laws.
(b) If appropriate, the Warrant and any Warrants issued upon
exercise or substitution or upon assignment or transfer pursuant to Section 1 or
Section 4, as the case may be, shall be stamped or imprinted with legends
setting forth the restrictions on transfer arising under applicable federal and
state securities laws.
9. Adjustments To Exercise Price.
(a) Subdivision, Combination or Reclassification of Common Stock.
(i) If the Company shall effect a subdivision of its shares
of Common Stock into a greater number of such shares or a combination of such
shares into a lesser number of shares, whether by forward or reverse stock
split, stock dividend (payable in shares of Common Stock) or otherwise, (i) the
Exercise Price and (ii) the number of shares of Common Stock acquirable and
receivable upon the exercise or conversion of this Warrant shall be
proportionally increased or reduced, as the case may be, to reflect the
effectuation of such subdivision or combination.
(ii) If the Company shall effect a capital reorganization
or reclassification of the Common Stock or any distribution by the Company to
holders of Common Stock (other than cash dividends on the Common Stock
distributed in accordance with the terms of the Company's Certificate of
Incorporation, as amended), whether in the form of stock, debt securities, or
other assets or property of the Company (each, an "Adjustment Event"), then, as
a condition of such Adjustment Event, lawful and adequate provision shall be
made whereby the holders of this Warrant shall thereafter have the right to
acquire and receive such shares of stock, securities, assets or property as
would have been issuable or payable as a result of such Adjustment Event with
respect to or in exchange for such number of outstanding shares of the Common
Stock as would have been received as if such Warrant were exercised immediately
prior to the consummation of such Adjustment Event.
(iii) In the event that an Adjustment Event shall occur by
means of an Acquisition in which this Warrant is assumed, then as a condition of
such Adjustment Event, lawful and adequate provision shall be made whereby the
Holders of this Warrant shall thereafter have the rights to acquire and receive
upon exercise or conversion of this Warrant, such shares of stock, securities or
assets as would have been issuable or payable as part of such Adjustment Event
with respect to or in exchange for such number of outstanding shares of Common
Stock as would have been received upon exercise or conversion of this Warrant
(in all instances) immediately before such Adjustment Event, and in any such
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case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Warrant such that the provisions hereof
(including without limitation provisions for adjustments of the Exercise Price
and of the number of shares of Common Stock acquirable and receivable upon the
exercise or conversion of this Warrant) shall be applicable, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
or conversion of this Warrant (including an immediate adjustment, by reason of
such Adjustment Event of the Warrant to the value for the Common Stock reflected
by the terms of such Adjustment Event if the value so reflected is less than the
Exercise Price in effect immediately prior to such Adjustment Event).
(b) Notices. Promptly following the determination of any
adjustment to the Exercise Price, the Company shall give written notice to
Holder setting forth in reasonable detail and certifying the calculation of such
adjustment.
10. Informational Rights. The Company shall furnish to Holder, within
30 days of Holder's request, any regularly prepared financial and other
information about the Company that: (1) a stockholder of the Company is entitled
to receive under Delaware law; or (2) the Company furnishes to its stockholders
on a regular basis as a course of practice or pursuant to any stockholder or
other agreement.
11. Amendments. This Warrant and any of the terms and provisions hereof
may be changed, waived, discharged or terminated without the prior written
consent of the Holder, provided that written consent to such change waiver,
discharge or termination is obtained by the Company from the holders of warrants
representing a majority of the shares of Common Stock issuable upon exercise of
all warrants of like tenor initially issued under the Note and Warrant Purchase
Agreement and outstanding as of the date of such consent.
12. No Impairment. The Company will not avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of any
Holder.
13. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware.
14. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first class mail, postage
prepaid, addressed (a) if to the Holder, to the address of the Holder set forth
in the Note and Warrant Purchase Agreement, or such other address as the Holder
shall have furnished to the Company in writing, or (b) if to the Company, to
Avalon Digital Marketing Systems, Inc., ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇,
▇▇▇▇▇, ▇▇ ▇▇▇▇▇, or at such other address as the Company shall have furnished to
the Holder in writing.
6
IN WITNESS WHEREOF, Avalon Digital Marketing Systems, Inc. has caused
this Warrant to be executed by its officer hereunto duly authorized.
Dated: ______ ___, 2004 AVALON DIGITAL MARKETING SYSTEMS, INC.
By:__________________________________________
Name:
Title:
7
EXHIBIT A
NOTICE OF EXERCISE
Dated , 20__
The undersigned hereby irrevocably elects to exercise its rights
pursuant to this Warrant to the extent of purchasing _______ shares of Common
Stock of Avalon Digital Marketing Systems, Inc., and hereby makes payment of
$________ in cash, in payment of the exercise price thereof.
[The undersigned hereby irrevocably elects to exercise its rights
pursuant to this Warrant to the extent of purchasing shares of Common Stock and
hereby authorizes you to deliver such shares of Common Stock for sale to
____________, and to retain from the proceeds of such sale $___________, in
cash, in payment of the exercise price thereof and to remit to the undersigned
the balance of such proceeds.]
INSTRUCTIONS FOR ISSUANCE OF STOCK
Name__________________________________________________________________
(Please typewrite or print in block letters)
Address ____________________________________________________________
Signature____________________________________________________________
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
Name: ______________________________________________
(Please typewrite or print in block letters)
Address _____________________________________________
the right to purchase Common Stock of Avalon Digital Marketing Systems, Inc.
(the "Company"), represented by this Warrant to the extent of _______ shares as
to which such right is exercisable and does hereby irrevocably constitute and
appoint _______________ as Attorney, to transfer the same on the books of the
Company with full power of substitution in the premises.
Date __________
Signature ___________________
Exhibit D-1
Schedule of Note Purchases at First Closing
Purchaser Principal Amount of Note Number of Shares (1)
--------- ------------------------ --------------------
Avalon Acquisition
Company, LLC $811,000 2,674,773
Total: $811,000 2,674,773
(1) reflects the aggregate number of shares of common stock of the Reorganized
Company the Note can be converted into, subject to adjustments.
Exhibit D-2
Schedule of Note Purchases at Second Closing
Purchaser Principal Amount of Note Number of Shares (1)
--------- ------------------------ --------------------
Avalon Acquisition
Company, LLC $789,000 2,469,022
Total: $789,000 2,469,022
(1) reflects the aggregate number of shares of common stock of the Reorganized
Company the Note can be converted into, subject to adjustments.
Exhibit E-1
Schedule of Warrant Issuance at First Closing
Warrant Purchase Number of
Purchaser (or its nominee or designee) Price Warrant Shares
-------------------------------------- ----- --------------
Networks Direct, Inc. $50 367,414
Total: $50 367,414
Exhibit E-2
Schedule of Warrant Issuance at Second Closing
Warrant Purchase Number of
Purchaser (or its nominee or designee) Price Warrant Shares
-------------------------------------- ----- --------------
Networks Direct, Inc. $50 367,414
Total: $50 367,414
Exhibit F
Risks Associated with Investing in Avalon
Investors should carefully consider the following risks before
investing in Avalon Digital Marketing Systems, Inc. ("Avalon") (Other OTC:
▇▇▇▇.▇▇). Investors should also refer to the reports filed by Avalon with the
Securities and Exchange Commission ("SEC"), including portions of its monthly
operating reports filed with Form 8-Ks.
Bankruptcy. On September 5, 2003, Avalon filed a voluntary petition for
reorganization relief under Chapter 11 of the United States Bankruptcy Code. At
that time, Avalon had $9,222,473 in unsecured debt and $412,129 in secured debt.
Unable to meet its debt obligations, Avalon sought protection under the
Bankruptcy Code to restructure its debt. When Avalon emerges from the Chapter 11
reorganization process in accordance with its Plan of Reorganization, it is
anticipated that its unsecured debt will be discharged and will be converted
into equity. However, even after the restructuring, Avalon may have liquidity
problems and present a going concern risk.
Future Capital Requirements; Uncertainty of Future Funding. The
investment of $1.6 million by the investors may not be sufficient to continue
the operation of Avalon (even after it emerges from bankruptcy). It is expected
that approximately $245,000 of the $1.6 million will be available for working
capital after paying for the secured debt and expenses in connection with
Avalon's reorganization process. Avalon may have to seek additional financing
through future public or private sales of its securities, including equity
securities, to meet the capital requirements for growth, development and
marketing programs. Avalon may also seek funding for development and marketing
of its products through strategic partnerships and other arrangements with
investment partners. There can be no assurance, however, that such collaborative
arrangements or additional funds will be available when needed, or on terms
acceptable to Avalon and the investors, if at all. Any such additional financing
may result in dilution to existing stockholders. If adequate funds are not
available, Avalon may have difficulty facilitating its growth and becoming
competitive in the marketplace.
No Established, Stable Market for Avalon Common Stock. There is no
established, stable market for Avalon Common Stock and its trading price has in
the past and may in the future be subject to significant fluctuations. Avalon
Common Stock is traded on the National Quotation Bureau's Pink Sheets and its
annual high price was $.48 per share and its annual low price was $.0001 per
share. Avalon may receive little or no coverage by security analysts and it may
be difficult to dispose of, or to obtain accurate quotations as to the market
value of, Avalon Common Stock.
In addition, Avalon Common Stock would be deemed "▇▇▇▇▇ stock." ▇▇▇▇▇
stocks generally are equity securities with a price of less than $5.00 per
share, other than securities registered on certain national securities exchange.
▇▇▇▇▇ stocks are subject to rules and regulations that impose additional sales
practice requirements on broker-dealers who sell the securities to persons other
than established customers and accredited investors, and these additional
requirements may restrict the ability of broker-dealers to sell a ▇▇▇▇▇ stock.
1
There are no assurances that Avalon will be able to satisfy NASDAQ's
initial listing requirements to be eligible to re-apply for listing on the
NASDAQ National Market upon emergence from the Chapter 11 reorganization.
Limited Public Float. After the restructuring under the Plan of
Reorganization, the number of shares of Avalon's outstanding Common Stock will
be reduced from 7,348,479 to 1,175,725. After converting the Notes and Warrants
purchased under the Note and Warrant Purchase and Security Agreement, the
investors are expected to own 5,878,617 shares or 80% of Avalon's outstanding
Common Stock. Because of the limited public market for Avalon's stock, the
investors may be unable to sell their shares when they desire to do so. In
addition, the market price for Avalon Common Stock could decrease significantly
at the time the registration statement is filed to register the resale of the
shares to be issued upon conversion of the Notes and the exercise of the
Warrants.
Need for Additional Personnel. The addition of specialized key
personnel and sales persons to assist Avalon to expand its business will be
necessary after Avalon emerges from bankruptcy. There can be no assurances
Avalon will be able to locate and hire such specialized personnel on acceptable
terms. In addition, Avalon had implemented cost cutting measures, including
reduction in personnel, to manage its liquidity and cash position. It may be
costly to restaff the positions that have been cut previously and to train new
employees.
Limited Operating History. Avalon was formed in March 1999 and
commenced its operations in January 2000. Avalon's limited operating history
does not provide the basis for evaluation of its current business and prospects
and makes it difficult to predict future results. Avalon should be considered a
development stage company.
Dependence on Existing Contracts. Seventy five percent (75%) of
Avalon's current revenue comes from previously sold contracts of software, web,
merchant and banking services to small businesses selling their products and
services on-line. It is expected that this revenue will gradually decline and
perhaps even cease to exist. Avalon will be required to generate revenues from
new contracts or secure additional funding to continue its operations.
Ability to Attract Customers and Suppliers. Due to Avalon's history of
bankruptcy, it may be difficult to attract customers and suppliers to conduct
business with it on terms that are favorable to Avalon. It may take a long
period of time before customers and suppliers become comfortable with Avalon's
business prospects. If Avalon cannot generate revenues from new contracts and
cannot raise additional financing, Avalon may not be able to continue its
operations.
Intense Competition. Avalon describes itself as a digital marketing
company. This is a category that expanded and received a great amount of
investment in the 1990's. As a result, there is significant over-capacity,
competition, margin and price compression, and industry consolidation, both from
direct competitors and advertising agencies developing their own branded
software products.
2
New Product Strategy. Avalon's current software or e-mail marketing
products offer no distinct competitive advantage. It has decided to develop
channel expertise in the distributor, agent, multi-level marketing industries
such as real estate, hotel, hospitality, insurance and similar sectors. Avalon
management does not have a track record of such development, launch, and the
sales and marketing skill set to make this effort successful. There are no
assurances that this strategy will be implemented with success or that
implementation of such strategy will enhance Avalon's business prospects.
Avalon's current software/e-mail marketing products need to be updated
and may need to offer new features for Avalon to develop successful channel
expertise. This will take about 6 months and several hundred thousand dollars.
There is no assurance that Avalon will be successful in updating and launching
such products.
Compliance under the Securities and Exchange Act. Investors will have
an illiquid investment and will not be able to sell their securities in the
public market until their securities have been registered. Avalon has not filed
all of the reports required to be filed by it under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) of the Exchange Act,
on a timely basis since its filing for bankruptcy protection. Therefore, Avalon
is not in compliance with the SEC rules and regulations and is currently
ineligible to use the short form registration statement on Form S-3 to register
the resale of the shares underlying the Notes and the Warrants. To be eligible
to use the Form S-3, the registrant must have filed all the material in a timely
manner required to be filed pursuant to the Exchange Act for a period of at
least 12 calendar months immediately preceding the filing of the registration
statement.
Therefore, to register the resale of the underlying shares, Avalon will
be required to file a registration statement on Form S-1 or file a registration
statement on Form S-3 after it becomes Form S-3 eligible. Registration statement
on Form S-1 requires complete disclosure in the prospectus, including audited
financial statements, and does not permit a company to incorporate information
by reference to other filings, Therefore, preparing a registration statement on
Form S-1 can be a very lengthy and costly process. There can be no assurances
that Avalon will successfully complete the audit of its financial statements and
successfully become current in its required SEC filings.