Execution Copy
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LATITUDE 90, INC.
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
DATED AS OF AUGUST 6, 1999
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TABLE OF CONTENTS
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Page
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1. Authorization and Closing...................................... 1
1A. Authorization of the Preferred Stock, Warrant and Note......... 1
1B. Purchase and Sale of the Preferred Stock, Warrant and Note..... 1
1C. The Closing.................................................... 1
2. Conditions of Each Purchaser's Obligation at the Closing....... 2
2A. Representations and Warranties; Covenants...................... 2
2B. Articles of Incorporation...................................... 2
2C. Amendment of the Company's Bylaws.............................. 3
2D. Registration Agreement......................................... 3
2E. Shareholders Agreement......................................... 3
2F. Sale of Series B Preferred, Warrant and Note to Each Purchaser. 3
2G. Securities Law Compliance...................................... 3
2H. Opinion of the Company's Counsel............................... 3
2I. Initial Public Offering Proposal............................... 3
2J. Commitment of Chairman......................................... 3
2K. Conversion of Note............................................. 4
2L. Strategic Investors............................................ 4
2M. Waiver of Put Option........................................... 4
2N. Closing Documents.............................................. 4
2O. Proceedings.................................................... 4
2P. Compliance with Applicable Laws................................ 5
2Q. Due Diligence.................................................. 5
3. Covenants...................................................... 5
3A. Financial Statements and Other Information..................... 5
3B. Inspection of Property......................................... 7
3C. Expenses of Directors.......................................... 8
3D. Restrictions................................................... 8
3E. Affirmative Covenants.......................................... 10
3F. Compliance with Agreements..................................... 12
3G. Current Public Information..................................... 12
3H. Reservation of Common Stock.................................... 12
3I. Intellectual Property Rights................................... 12
3J. First Refusal Rights........................................... 13
3K. Public Disclosures............................................. 14
3L. Key Man Insurance.............................................. 14
4. Transfer of Restricted Securities.............................. 14
4A. General Provisions............................................. 14
4B. Opinion Delivery............................................... 14
4C. Rule 144A...................................................... 15
4D. Legend Removal................................................. 15
5. Representations and Warranties of the Company.................. 15
5A. Organization, Corporate Power and Licenses..................... 15
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5B. Capital Stock and Related Matters.............................. 15
5C. Subsidiaries; Investments...................................... 16
5D. Authorization; No Breach....................................... 16
5E. Financial Statements........................................... 17
5F. Absence of Undisclosed Liabilities............................. 17
5G. No Material Adverse Change..................................... 18
5H. Absence of Certain Developments................................ 18
5I. Assets......................................................... 19
5J. Tax Matters.................................................... 20
5K. Contracts and Commitments; Significant Customers............... 21
5L. Intellectual Property Rights................................... 23
5M. Litigation, etc................................................ 24
5N. Brokerage...................................................... 24
5O. Governmental Consent, etc...................................... 24
5P. Insurance...................................................... 25
5Q. Employees...................................................... 25
5R. ERISA.......................................................... 25
5S. Compliance with Laws........................................... 27
5T. Affiliated Transactions........................................ 27
5U. Web Site....................................................... 27
5V. Disclosure..................................................... 28
5W. Knowledge...................................................... 28
6. Definitions.................................................... 28
6A. Definitions.................................................... 28
7. Miscellaneous.................................................. 32
7A. Expense........................................................ 32
7B. Remedies....................................................... 32
7C. Purchaser's Investment Representations......................... 32
7D. Consent to Amendments.......................................... 33
7E. Survival of Representations and Warranties..................... 33
7F. Successors and Assigns......................................... 33
7G. Generally Accepted Accounting Principles....................... 33
7H. Severability................................................... 33
7I. Counterparts................................................... 34
7J. Descriptive Headings; Interpretation........................... 34
7K. Governing Law.................................................. 34
7L. Notices........................................................ 34
7M. No Strict Construction......................................... 35
7N. Arbitration.................................................... 35
Schedules and Exhibits
Schedule of Purchasers
List of Exhibits
List of Disclosure Schedules
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LATITUDE 90, INC.
SERIES B PREFERRED STOCK
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PURCHASE AGREEMENT
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THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT is made as of August
6, 1999, among LATITUDE 90, INC., a California corporation (the "Company"), and
the Persons listed on the Schedule of Purchasers attached hereto (collectively
referred to herein as the "Purchasers" and individually as a "Purchaser").
Except as otherwise indicated herein, capitalized terms used herein are defined
in Section 6 hereof.
The parties hereto agree as follows:
Section 1. Authorization and Closing.
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1A. Authorization of the Preferred Stock, Warrant and Note. The
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Company shall authorize the issuance and sale of (i) up to 3,293,819 shares of
its Series B Preferred Stock, par value $.01 per share (the "Series B
Preferred"), at a purchase price of $2.43 per share, having the rights and
preferences set forth in Exhibit A attached hereto, (ii) a warrant (the
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"Warrant") to purchase 514,659 shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), at a purchase price of $0.01 per share, in
the form attached hereto as Exhibit B, and (iii) a promissory note (the "Note"),
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in the form attached hereto as Exhibit C. The Series B Preferred is convertible
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into shares of the Common Stock.
1B. Purchase and Sale of the Preferred Stock, Warrant and Note. At
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the applicable Closing (as defined below), the Company shall sell to each
Purchaser and, subject to the terms and conditions set forth herein, each
Purchaser shall purchase from the Company (i) the number of shares of Series B
Preferred set forth opposite such Purchaser's name on the Schedule of Purchasers
attached hereto at a cash price of $2.43 per share, (ii) the Warrant which shall
permit such Purchaser to initially purchase a number of shares of Common Stock
set forth opposite such Purchaser's name on the Schedule of Purchasers, at an
exercise price of $3.64 per share, and (iii) the Note in the amount set forth
opposite such Purchaser's name on the Schedule of Purchasers for the Note
Closing (as defined below). The sale of the Series B Preferred, the Warrant and
the Note to each Purchaser shall constitute a separate sale hereunder.
1C. The Closing. (i) The initial closing of the separate purchases
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and sales of the Series B Preferred and the Warrant (the "Initial Closing") to
the Purchasers (the "Initial Purchasers") shall take place at the offices of
▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ at 10:00 a.m. on (A) August 6, 1999, or (B) if later than such
date, the third business day following satisfaction or waiver of the conditions
set forth in Section 2 hereof, or (C) at such other place or on such other date
as may be mutually agreeable to the Company and each Initial Purchaser.
(ii) At the Initial Closing, DigaComm L.L.C., one of the Purchasers,
shall deposit $2.0 million (the "Escrow Amount") into an escrow account held by
counsel for the Company. If all the conditions to closing set forth in Section
2 hereof are satisfied or waived prior to or on August 27, 1999, the Escrow
Amount shall be allocated toward the purchase and sale of the Note on the date
such conditions are satisfied or waived (the "Note Closing"); otherwise, the
Escrow Amount shall be released and returned to DigaComm, L.L.C. To the extent
that there are Subsequent Sales (as defined below) prior to August 27, 1999, the
Escrow Amount shall be reduced and released to DigaComm, L.L.C. to the extent of
such Subsequent Sales on a dollar-for-dollar basis.
(iii) At any time on or before the date ninety (90) days from the
date hereof, the Company may sell up to an additional 2,470,364 shares of Series
B Preferred for a purchase price of $2.43 per share. All such sales (the
"Subsequent Sales") shall be made on the terms and conditions set forth in this
Agreement. The shares sold in the Subsequent Sales shall also be "Series B
Preferred" for all purposes under this Agreement, and the purchasers thereof
shall also be deemed to be "Purchasers" for all purposes under this Agreement,
"Investors" for all purposes under the Registration Agreement (as defined below)
and "Investors" for all purposes under the Shareholders Agreement (as defined
below), and parties to such agreements upon execution thereof. Each closing of
the sale of the Series B Preferred, the Warrant or Note hereunder, including
the Initial Closing and Note Closing, shall be referred to herein as a
"Closing." At each Closing, the Company shall deliver to each Purchaser stock
certificates evidencing the Series B Preferred (if any) to be purchased by such
Purchaser, the Warrant (if any) to be purchased by such Purchaser and the Note
(if any) to be purchased by such Purchaser, registered in such Purchaser's or
its nominee's name, upon payment of the purchase price thereof by a cashier's or
certified check, or by wire transfer of immediately available funds to the
Company's account designated by the Company in writing to the Purchasers, in the
aggregate amount set forth opposite such Purchaser's name on the Schedule of
Purchasers.
Section 2. Conditions of Each Purchaser's Obligation at the Closing.
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The obligation of each Purchaser to purchase and pay for the Series B Preferred,
the Warrant and the Note at the Closing is subject to the satisfaction as of the
Closing of the following conditions. Any condition specified in this Section 2
may be waived if consented to by each Purchaser; provided that no such waiver
shall be effective against any Purchaser unless it is set forth in a writing
executed by such Purchaser; provided, further, the Purchaser in the Initial
Closing hereby waives the conditions set forth in Sections 2I, 2L, 2M and 2Q.
2A. Representations and Warranties; Covenants. The representations
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and warranties contained in Section 5 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions expressly contemplated herein,
and the Company shall have performed in all material respects all of the
covenants required to be performed by it hereunder prior to the Closing.
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2B. Articles of Incorporation. The Company shall have duly adopted,
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executed and filed with the Secretary of State of California its Restated
Articles of Incorporation (the "Restated Articles") establishing the terms and
the relative rights and preferences of the Series B Preferred in the form set
forth in Exhibit A hereto, and the Company shall not have adopted or filed any
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other document designating terms, relative rights or preferences of its
preferred stock, except as expressly set forth therein. The Restated Articles
shall be in full force and effect as of the Closing under the laws of California
and shall not have been amended or modified.
2C. Amendment of the Company's Bylaws. The Company's bylaws shall
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have been duly amended to establish the size of the board at seven (7)
directors, one (1) to be designated by holders of Series A Preferred Stock,
three (3) to be designated by holders of Series B Preferred and three (3) to be
designated by holders of the Common Stock. The Company's bylaws shall be in
full force and effect as of the Closing as so amended and shall not have been
further amended or modified, except as contemplated herein.
2D. Registration Agreement. The Company and the Purchasers shall
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have entered into a registration agreement in form and substance as set forth in
Exhibit D attached hereto (the "Registration Agreement").
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2E. Shareholders Agreement. The Company, the Purchasers and holders
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of the Company's Series A Preferred Stock shall have entered into a shareholders
agreement in form and substance set forth in Exhibit E attached hereto (the
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"Shareholders Agreement").
2F. Sale of Series B Preferred, Warrant and Note to Each Purchaser.
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The Company shall have simultaneously sold to each Purchaser the Series B
Preferred, the Warrant and the Note to be purchased by such Purchaser hereunder
at the applicable Closing and shall have received payment therefor in full.
2G. Securities Law Compliance. The Company shall have made all
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filings under all applicable federal and state securities laws necessary to
consummate the issuance of the Series B Preferred, the Warrant and the Note
pursuant to this Agreement in compliance with such laws.
2H. Opinion of the Company's Counsel. Each Purchaser shall have
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received from Paul, Hastings, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP, counsel for the Company, an
opinion with respect to the matters set forth in Exhibit F attached hereto,
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which shall be addressed to each Purchaser, dated the date of the Closing and in
form and substance reasonably satisfactory to each ▇▇▇▇▇▇▇▇▇.
▇▇. Initial Public Offering Proposal. The Company shall have
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received a proposal for an initial public offering of the Common Stock from the
proposed lead underwriter in such offering, in a form and substance satisfactory
to each Purchaser.
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2J. Commitment of Chairman. The Company shall have obtained from
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▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ a commitment to continue as the chairman of the Company, in
a form and substance reasonably satisfactory to each Purchaser.
2K. Conversion of Note. The Company shall have obtained from
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Prudential Roman Arch Fund a written commitment to convert the fund's $1,000,000
loan advance into shares of Series B Preferred in a form and substance
satisfactory to each Purchaser, or the Company shall have paid in full such loan
advance.
2L. Strategic Investors. The Company shall have obtained a
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commitment from potential investors subscribing to a minimum of 823,455 shares
of the Series B Preferred for a purchase price of $2.43 per share, in a form and
substance reasonably satisfactory to each Purchaser.
2M. Waiver of Put Option. The Company shall have obtained a written
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waiver from ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ regarding his put option referenced in
paragraph 4 (iii) of the "Capitalization Schedule" attached hereto.
2N. Closing Documents. The Company shall have delivered to each
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Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in Section 1 and paragraphs 2A through
2M, inclusive, have been fully satisfied;
(ii) certified copies of (a) the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement and each of the
other agreements contemplated hereby, the filing of the Restated Articles, the
amendment to the Company's bylaws referred to in paragraph 2C, the issuance
and sale of the Series B Preferred, the issuance of the Warrant, the issuance
of the Note, the reservation for issuance upon conversion of the Series B
Preferred and exercise of the Warrant and the consummation of all other
transactions contemplated by this Agreement, and (b) the resolutions duly
adopted by the Company's shareholders adopting the Restated Articles;
(iii) certified copies of the Restated Articles and the Company's
bylaws, each as in effect at the Closing; and
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder
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(including, without limitation, all blue sky law filings and waivers of all
preemptive rights and rights of first refusal);
2O. Proceedings. All corporate and other proceedings taken or
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required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Purchaser and its special counsel.
2P. Compliance with Applicable Laws. The purchase of Series B
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Preferred, the Warrant and the Note by each Purchaser hereunder shall not be
prohibited by any applicable law or governmental rule or regulation and shall
not subject such Purchaser to any penalty or liability under or pursuant to any
applicable law or governmental rule or regulation, and the purchase of the
Series B Preferred, the Warrant and the Note by each Purchaser hereunder shall
be permitted by laws, rules and regulations of the jurisdictions and
governmental authorities and agencies to which such Purchaser is subject.
2Q. Due Diligence. Each Purchaser shall be fully satisfied in its
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sole discretion with the results of its review of all of the disclosure
schedules and its review of and other due diligence investigations with respect
to, the business, operations, affairs, prospects, properties, assets, existing
and potential liabilities, obligations, profits and condition (financial or
otherwise) of the Company, including without limitation, the Company's progress
in amending certain of its existing customer contracts so that the Company may
include such gross revenue as a reporting position.
Section 3. Covenants.
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3A. Financial Statements and Other Information. The Company shall
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deliver to each Purchaser (so long as such Purchaser holds any Series B
Preferred or any Underlying Common Stock) and to each holder of at least 10% of
the outstanding Series B Preferred and each holder of at least 10% of the
Underlying Common Stock:
(i) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year, unaudited
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries for such monthly period and for the period from
the beginning of the fiscal year to the end of such month, and unaudited
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such monthly period, setting forth in each case
comparisons to the Company's annual budget and to the corresponding period in
the preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently applied
omitting footnotes and shall be certified by the Company's principal financial
officer;
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(ii) within 90 days after the end of each fiscal year,
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries for such fiscal year, and consolidating and
consolidated balance sheets of the Company and its Subsidiaries as of the end
of such fiscal year, setting forth in each case comparisons to the Company's
annual budget and to the preceding fiscal year, all prepared in accordance
with generally accepted accounting principles, consistently applied, and
accompanied by (a) with respect to the consolidated portions of such
statements, an opinion of an independent accounting firm of recognized
national standing and (b) a certificate from such accounting firm, addressed
to the Company's board of directors, stating that in the course of its
examination nothing came to its attention that caused it to believe that there
was any default by the Company or any Subsidiary in the fulfillment of or
compliance with any of the material terms, covenants, provisions or conditions
of any material agreement to which the Company or any Subsidiary is a party
or, if such accountants have reason to believe any default by the Company or
any Subsidiary exists, a certificate specifying the nature and period of
existence thereof;
(iii) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the Company
by its independent accountants (and not otherwise contained in other materials
provided hereunder);
(iv) at least 30 days but not more than 90 days prior to the
beginning of each fiscal year, an annual budget prepared on a monthly basis
for the Company and its Subsidiaries for such fiscal year (displaying
anticipated statements of income and cash flows and balance sheets), and
promptly upon preparation thereof any other significant budgets prepared by
the Company and any revisions of such annual or other budgets, and within 30
days after any monthly period in which there is a material adverse deviation
from the annual budget, an Officer's Certificate explaining the deviation and
what actions the Company has taken and proposes to take with respect thereto;
(v) promptly (but in any event within five business days) after
the discovery or receipt of notice of any material default under any material
agreement to which it or any of its Subsidiaries is a party, any condition or
event which is reasonably likely to result in any material liability under any
federal, state or local statute or regulation relating to public health and
safety, worker health and safety or pollution or protection of the
environment or any other material adverse change, event or circumstance
affecting the Company or any Subsidiary (including, without limitation, the
filing of any material litigation against the Company or any Subsidiary or the
existence of any dispute with any Person which involves a reasonable
likelihood of such litigation being commenced), an Officer's Certificate
specifying the nature and period of existence thereof and what actions the
Company and its Subsidiaries have taken and propose to take with respect
thereto;
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(vi) within ten days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general written
communications which the Company sends to its stockholders and copies of all
registration statements and all regular, special or periodic reports which it
files with the Securities and Exchange Commission or with any securities
exchange on which any of its securities are then listed, and copies of all
press releases and other statements made available generally by the Company to
the public concerning material developments in the Company's and its
Subsidiaries' businesses; and
(vii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this paragraph 3A may reasonably
request.
Each of the financial statements referred to in subparagraph (i) and (ii) shall
be true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments (none of which would, alone
or in the aggregate, be materially adverse to the financial condition, operating
results, assets, operations or business prospects of the Company and its
Subsidiaries taken as a whole).
Notwithstanding the foregoing, the provisions of this paragraph 3A shall cease
to be effective so long as the Company (a) is subject to the periodic reporting
requirements of the Securities Exchange Act and continues to comply with such
requirements and (b) promptly provides to each Person otherwise entitled to
receive information pursuant to this paragraph 3A all reports and other
materials filed by the Company with the Securities and Exchange Commission
pursuant to the periodic reporting requirements of the Securities Exchange Act;
provided that so long as any Series B Preferred remains outstanding, the Company
shall continue to deliver to each Purchaser (so long as such Purchaser holds any
Series B Preferred) and to each holder of at least 10% of the outstanding Series
B Preferred the information specified in subparagraphs 3A(ii) and 3A(v).
For purposes of paragraphs 3A and 3B hereof, the term "Purchaser" shall include
any partner of a Purchaser who received shares of Series B Preferred or
Underlying Common Stock pursuant to a distribution from or a liquidation of such
Purchaser.
3B. Inspection of Property. The Company shall permit any
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representatives designated by any Purchaser (so long as such Purchaser holds any
Series B Preferred or Underlying Common Stock) or any holder of at least 10% of
the outstanding Series B Preferred or at least 10% of the Underlying Common
Stock, upon reasonable notice and during normal business hours and at such other
times as any such holder may reasonably request, to (i) visit and inspect any of
the properties of the Company and its Subsidiaries, (ii) examine the corporate
and financial records of the Company and its Subsidiaries and make copies
thereof or extracts therefrom and (iii) discuss the
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affairs, finances and accounts of any such corporations with the directors,
officers, key employees and independent accountants of the Company and its
Subsidiaries. The presentation of an executed copy of this Agreement by any
Purchaser or any such holder of Series B Preferred or Underlying Common Stock to
the Company's independent accountants shall constitute the Company's permission
to its independent accountants to participate in discussions with such Persons.
3C. Expenses of Directors. All reasonable out-of-pocket expenses of
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each board member, designated by the Series B Preferred pursuant to the Restated
Articles, incurred in connection with attending regular and special board
meetings and any meeting of any board committee shall be paid by the Company,
upon submission to the Company of appropriate documentation or receipts.
3D. Restrictions. So long as any Series B Preferred remains
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outstanding, the Company shall not, without the prior written consent of the
holders of a majority of the outstanding Series B Preferred:
(i) directly or indirectly declare or pay any dividends or make
any distributions upon any of its capital stock or other equity securities
other than the Series A Preferred (defined below) or the Series B Preferred
pursuant to the terms of the Restated Articles, except for dividends payable
in shares of Common Stock issued upon the outstanding shares of Common Stock;
(ii) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's or any Subsidiary'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; except
for repurchases of Common Stock from employees, directors, consultants or
advisors of the Company and its Subsidiaries upon termination of employment
pursuant to arrangements approved by the Company's board of directors;
(iii) except as expressly contemplated by this Agreement,
authorize, issue or enter into any agreement providing for the issuance
(contingent or otherwise) of, (a) any notes or debt securities containing
equity features (including, without limitation, any notes or debt securities
convertible into or exchangeable for capital stock or other equity securities,
issued in connection with the issuance of capital stock or other equity
securities or containing profit participation features) or (b) any capital
stock or other equity securities (or any securities convertible into or
exchangeable for any capital stock or other equity securities) which are
senior to or on a parity with the Series B Preferred with respect to the
payment of dividends, redemptions or distributions upon liquidation or
otherwise;
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(iv) make, or permit any Subsidiary to make, any loans or
advances to, guarantees for the benefit of, or Investments in, any Person
(other than a Wholly-Owned Sub sidiary), except for (a) reasonable advances to
employees in the ordinary course of business, (b) acquisitions permitted
pursuant to subparagraph (viii) below and (c) Investments having a stated
maturity no greater than one year from the date the Company makes such
Investment in (1) obligations of the United States government or any agency
thereof or obligations guaranteed by the United States government, (2)
certificates of deposit of commercial banks having combined capital and
surplus of at least $50 million or (3) commercial paper with a rating of at
least "Prime-1" by ▇▇▇▇▇'▇ Investors Service, Inc.;
(v) merge or consolidate with any Person or, except as
permitted by subparagraph (viii) below, permit any Subsidiary to merge or
consolidate with any Person (other than a Wholly-Owned Subsidiary);
(vi) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 25% of the
consolidated assets of the Company and its Subsidiaries (computed on the basis
of book value, determined in accordance with generally accepted accounting
principles consistently applied, or fair market value, determined by the
Company's board of directors in its reasonable good faith judgment) in any
transaction or series of related transactions (other than sales in the
ordinary course of business) or sell or permanently dispose of any of its or
any Subsidiary's material Intellectual Property Rights;
(vii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes);
(viii) acquire, or permit any Subsidiary to acquire, any interest
in any company or business (whether by a purchase of assets, purchase of
stock, merger or otherwise), or enter into any joint venture, unless the
transaction is approved by the Company's board of directors;
(ix) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than the
business of the Company and any Subsidiary at Closing;
(x) become subject to, or permit any of its Subsidiaries to
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 (a) the right of any Subsidiary to make loans or
advances or pay dividends to, transfer property to,
9
or repay any Indebtedness owed to, the Company or another Subsidiary or (b)
the Company's right to perform the provisions of this Agreement, the
Registration Agreement, the Restated Articles or the Company's bylaws
(including, without limitation, provisions relating to the declaration and
payment of dividends on and conversions of the Series B Preferred);
(xi) except as expressly contemplated by this Agreement, make
any amendment to the Restated Articles or the Company's bylaws, or file any
resolution of the board of directors with the California Secretary of State
containing any provisions, which would increase the number of authorized
shares of the preferred stock of the Company or adversely affect or otherwise
impair the rights or the relative preferences and priorities of the holders of
the Series B Preferred or the Underlying Common Stock under this Agreement,
the Restated Articles, the Company's bylaws or the Registration Agreement;
(xii) enter into, amend, modify or supplement, or permit any
Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, employees, shareholders or Affiliates or with any
individual related by blood, marriage or adoption to any such individual or
with any entity in which any such Person or individual owns a beneficial
interest, except for customary employment arrangements and benefit programs on
reasonable terms and except as otherwise expressly contemplated by this
Agreement;
(xiii) increase any compensation (including salary, bonuses and
other forms of current and deferred compensation) payable to any officer or
director of the Company or any Subsidiary, unless such action is approved by a
majority of disinterested directors of the Company's board of directors;
(xiv) make any capital expenditures (including, without
limitation, payments with respect to capitalized leases, as determined in
accordance with generally accepted accounting principles consistently applied)
exceeding $100,000 in the aggregate on a consolidated basis during any twelve-
month period, unless such actions are approved by the Company's board of
directors;
(xv) enter into any leases or other rental agreements
(excluding capitalized leases, as determined in accordance with generally
accepted accounting principles consistently applied) under which the amount
of the aggregate lease payments for all such agreements exceeds $100,000 on a
consolidated basis for any twelve-month period, unless such actions are
approved by the Company's board of directors;
(xvi) increase or decrease the authorized size of its board of
directors above or below seven (7) members;
10
(xvii) use the proceeds from the sale of the Series B Preferred
other than for working capital and general corporate purposes and as set forth
on the attached "Use of Proceeds Schedule."
------------------------
3E. Affirmative Covenants. So long as any Series B Preferred remains
---------------------
outstanding, the Company shall, and shall cause each Subsidiary to:
(xviii) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(xix) maintain its assets so that its businesses may be
properly and advantageously conducted at all times;
(xx) pay and discharge when payable all taxes, assessments and
governmental charges imposed upon its properties or upon the income or profits
therefrom (in each case before the same becomes delinquent and before
penalties accrue thereon) and all claims for labor, materials or supplies
which if unpaid would by law become a Lien upon any of its property, unless
and to the extent that the same are being contested in good faith and by
appropriate proceedings and adequate reserves (as determined in accordance
with generally accepted accounting principles, consistently applied) have been
established on its books with respect thereto;
(xxi) comply with all other material obligations which it
incurs pursuant to any contract or agreement, whether oral or written, express
or implied, as such obligations become due, unless and to the extent that (A)
the same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its
books with respect thereto, or (B) the breach thereof would not reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole;
(xxii) comply with all applicable laws, rules and regulations of
all governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole;
(xxiii) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of such types and in
such amounts as are customary for corporations of similar size engaged in
similar lines of business;
11
(xxiv) maintain proper books of record and account which present
fairly in all material respects its financial condition and results of
operations and make provisions on its financial statements for all such proper
reserves as in each case are required in accordance with generally accepted
accounting principles, consistently applied; and
(xxv) enter into and maintain proprietary assignment and
information agreements with its key employees.
3F. Compliance with Agreements. The Company shall perform and
--------------------------
observe (i) all of its obligations to each holder of the Series B Preferred and
all of its obligations to each holder of the Underlying Common Stock set forth
in the Restated Articles and the Company's bylaws, (ii) all of its obligations
to each holder of the Warrant set forth therein, (iii) all of its obligations to
each holder of the Note set forth therein, (iv) all of its obligations to each
holder of Registrable Securities set forth in the Registration Agreement and (v)
all of its obligations set forth in the Shareholders Agreement.
3G. Current Public Information. At all times after the Company has
--------------------------
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
3H. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the conversion of the Series B
Preferred and exercise of the Warrant, such number of shares of Common Stock
issuable upon the conversion of all outstanding Series B Preferred and exercise
of the outstanding Warrant. All shares of Common Stock and Series B Preferred
which are so issuable shall, when issued, be duly and validly issued, fully paid
and nonassessable and free from all taxes, liens and charges. The Company shall
take all such actions as may be necessary to assure that all such shares of
Common Stock and Series B Preferred may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which such shares may be listed (except for official
notice of issuance which shall be immediately transmitted by the Company upon
issuance).
12
3I. Intellectual Property Rights. The Company shall, and shall
----------------------------
cause each Subsidiary to, possess and maintain all material Intellectual
Property Rights necessary to the conduct of their respective businesses and own
all right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights. Neither the Company nor any Subsidiary shall take
any action, or fail to take any action, which would result in the invalidity,
abandonment, misuse or unenforceability of such Intellectual Property Rights or
which would infringe upon or misappropriate any rights of other Persons.
3J. First Refusal Rights.
--------------------
(i) Except for issuances of Common Stock or Series B Preferred
(a) to the Company's employees, directors, consultants and advisors for
incentive purposes, (b) upon the conversion of the Series A Preferred and the
Series B Preferred or upon the exercise of the Warrant, (c) in connection with
the acquisition of another company or business as contemplated by paragraph
3D(viii), (d) upon issuance of payment in kind dividends to the holders of the
Series B Preferred, (e) pursuant to the exercise of any other option, warrant,
right or convertible security outstanding on the date hereof or (f) pursuant to
a public offering registered under the Securities Act, if the Company authorizes
the issuance or sale of any shares of Common Stock or any securities containing
options or rights to acquire any shares of Common Stock (other than as a
dividend on the outstanding Common Stock), the Company shall first offer to sell
to each holder of Series B Preferred who is then an accredited investor (as
defined in Rule 501(a) under the Securities Act) a portion of such stock or
securities equal to the quotient determined by dividing (1) the number of shares
of Under lying Common Stock then held by such holder by (2) the sum of the total
number of shares of Underlying Common Stock and the number of shares of Common
Stock outstanding which are not shares of Underlying Common Stock and the number
of shares of Common Stock then issuable upon the exercise of all options,
warrants, rights or conversion rights then outstanding or reserved for issuance.
Each holder of shall be entitled to purchase such stock or securities at the
most favorable price and on the most favorable terms as such stock or securities
are to be offered to any other Persons. The purchase price for all stock and
securities offered to the holders of the Series B Preferred shall be payable in
cash.
(ii) In order to exercise its purchase rights hereunder, a holder
of Series B Preferred must within 15 days after receipt of written notice from
the Company describing in reasonable detail the stock or securities being
offered, the purchase price thereof, the payment terms and such holder's
percentage allotment deliver a written notice to the Company describing its
election hereunder. If all of the stock and securities offered to the holders of
Series B Preferred is not fully subscribed by such holders, the remaining stock
and securities shall be re-offered by the Company to the holders purchasing
their full allotment upon the terms set forth in this paragraph, except that
such holders must exercise their purchase rights within five days after receipt
of such re-offer.
13
(iii) Upon the expiration of the offering periods described above,
the Company shall be entitled to sell such stock or securities which the holders
of Series B Preferred have not elected to purchase during the 90 days following
such expiration on terms and conditions no more favorable to the purchasers
thereof than those offered to such holders. Any stock or securities offered or
sold by the Company after such 90-day period must be re-offered to the holders
of Series B Preferred pursuant to the terms of this paragraph.
(iv) The rights of the holders of Series B Preferred under this
paragraph shall terminate upon the effectiveness of a registration statement
filed by the Company with the Securities and Exchange Commission under the
Securities Act with respect to an offering of Common Stock underwritten by an
investment bank with a national reputation; provided that if the registration
statement is withdrawn or abandoned before any shares of Common Stock are sold
thereunder, the provisions of this paragraph shall remain in effect.
3K. Public Disclosures. The Company shall not, nor shall it
------------------
permit any Subsidiary to, disclose any Purchaser's name or identity as an
investor in the Company in any press release or other public announcement or in
any document or material filed with any governmental entity, without the prior
written consent of such Purchaser (which consent shall not be unreasonably
withheld), unless such disclosure is required by applicable law or governmental
regulations or by order of a court of competent jurisdiction, in which case
prior to making such disclosure the Company shall give written notice to such
Purchaser describing in reasonable detail the proposed content of such
disclosure and shall permit the Purchaser to review and comment upon the form
and substance of such disclosure.
3L. Key Man Insurance. The Company shall possess within thirty
-----------------
(30) days of the Initial Closing and maintain thereafter a $2,000,000 key man
insurance policy with respect to ▇▇▇▇ ▇. ▇▇▇▇▇ (or his replacement) under which
such policy the Company is the beneficiary.
Section 4. Transfer of Restricted Securities.
---------------------------------
4A. General Provisions. Restricted Securities are transferable
------------------
only pursuant to (i) public offerings registered under the Securities Act, (ii)
Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar
rule or rules then in force) if such rule is available and (iii) subject to the
conditions specified in paragraph 4B below, any other legally available means of
transfer.
4B. Opinion Delivery. In connection with the transfer of any
----------------
Restricted Securities (other than a transfer described in paragraph 4A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together
with, if reasonably requested by the Company, an opinion of ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ or
other counsel which (to the Company's reasonable satisfaction) is knowledgeable
in securities law matters
14
to the effect that such transfer of Restricted Securities may be effected
without registration of such Restricted Securities under the Securities Act. In
addition, if the holder of the Restricted Securities delivers to the Company an
opinion of ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇ or such other counsel that no subsequent transfer of
such Restricted Securities shall require registration under the Securities Act,
the Company shall promptly upon such contemplated transfer deliver new
certificates for such Restricted Securities which do not bear the Securities Act
legend set forth in paragraph 7C. If the Company is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this paragraph and paragraph 7C.
4C. Rule 144A. Upon the request of any Purchaser, the Company shall
---------
promptly supply to such Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
4D. Legend Removal. If any Restricted Securities become eligible for
--------------
sale pursuant to Rule 144(k), the Company shall, upon the request of the holder
of such Restricted Securities (accompanies by such documents or certificates as
the Company may reasonably request), remove the legend set forth in paragraph 7C
from the certificates for such Restricted Securities.
Section 5. Representations and Warranties of the Company. As a
---------------------------------------------
material inducement to the Purchasers to enter into this Agreement and purchase
the Series B Preferred and the Warrant hereunder, the Company hereby represents
and warrants to the Purchasers that:
5A. Organization, Corporate Power and Licenses. The Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of California and, except as set forth on the attached "Organization Schedule"
(which would not have a material adverse effect on the Company's business,
operating results or financial condition), is qualified to do business in every
jurisdiction in which its ownership of property or conduct of business requires
it to qualify. The Company possesses all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of the Company's and each
Subsidiary's charter documents and bylaws which have been furnished to the
Purchasers' special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
---------------------------------
(i) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 10,000,000 shares of preferred
stock, of which 2,000 shares shall
15
be designated as Series A Preferred (the "Series A Preferred") (of which 2,000
shares shall be issued and outstanding) and 5,000,000 shares shall be designated
as Series B Preferred (of which 823,455 shares shall be issued and outstanding)
and (b) 40,000,000 shares of Common Stock, of which 10,000,000 shares shall be
issued and outstanding and 2,500,000 shares shall be reserved for issuance upon
conversion of the Series A Preferred and 5,000,000 shares shall be reserved for
issuance upon conversion of the Series B Preferred or exercise of the Warrant.
As of the Closing, neither the Company nor any Subsidiary shall have outstanding
any stock or securities convertible or exchangeable for any shares of its
capital stock or containing any profit participation features, nor shall it have
outstanding any rights or options to subscribe for or to purchase its capital
stock or any stock or securities convertible into or exchangeable for its
capital stock or any stock appreciation rights or phantom stock plans, except
for the Series B Preferred and the Warrant and except as set forth on the
attached "Capitalization Schedule." The Capitalization Schedule accurately sets
forth the following information with respect to all outstanding options and
rights to acquire the Company's capital stock: the holder, the number of shares
covered, the exercise price and the expiration date. As of the Closing, neither
the Company nor any Subsidiary shall be subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its capital
stock, except as set forth on the Capitalization Schedule. As of the Closing,
all of the outstanding shares of the Company's capital stock shall be validly
issued, fully paid and nonassessable.
(ii) There are no statutory or, to the best of the Company's
knowledge, contractual shareholders' preemptive rights or rights of refusal with
respect to the issuance of the Series B Preferred or the Warrant hereunder, the
issuance of the Common Stock upon conversion of the Series B Preferred or upon
exercise of the Warrant. The Company has not violated any applicable federal or
state securities laws in connection with the offer, sale or issuance of any of
its capital stock, and the offer, sale and issuance of the Series B Preferred,
the Warrant or the Note hereunder do not require registration under the
Securities Act or any applicable state securities laws. To the best of the
Company's knowledge, there are no agreements between the Company's shareholders
with respect to the voting or transfer of the Company's capital stock or with
respect to any other aspect of the Company's affairs, except as set forth in the
Capitalization Schedule.
5C. Subsidiaries; Investments. The attached "Subsidiary Schedule"
-------------------------
correctly sets forth the name of each Subsidiary, the jurisdiction of its
incorporation and the Persons owning the outstanding capital stock of such
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own its properties and to carry on its businesses as
now being conducted and as presently proposed to be conducted and is qualified
to do business in every jurisdiction in which its ownership of property or the
conduct of business requires it to qualify. All of the outstanding shares of
capital stock of each Subsidiary are validly issued, full paid and
nonassessable, and all such shares are owned by the Company or another
Subsidiary free and clear of any Lien and not subject to any option or right to
16
purchase any such shares. Except as set forth on the Subsidiary Schedule,
neither the Company nor any Subsidiary owns or holds the right to acquire any
shares of stock or any other security or interest in any other Person.
5D. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement, the Warrant, the Note, the Registration
Agreement, the Shareholders Agreement and all other agreements contemplated
hereby to which the Company is a party, the filing of the Restated Articles and
the amendment of the Company's bylaws have been duly authorized by the Company.
This Agreement, the Warrant, the Note, the Registration Agreement, the
Shareholders Agreement and all other agreements contemplated hereby to which the
Company is a party each constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms, except as such enforceability
is limited by bankruptcy, insolvency, moratorium or other laws affecting the
enforcement or creditors' rights generally, and by general equitable principles.
Except as set forth on the attached "Restrictions Schedule," the execution and
delivery by the Company of this Agreement, the Registration Agreement, the
Shareholders Agreement and all other agreements contemplated hereby to which the
Company is a party, the offering, sale and issuance of the Series B Preferred,
the Warrant and the Note hereunder, the issuance of the Common Stock upon
conversion of the Series B Preferred, the issuance of Common Stock upon exercise
of the Warrant, the filing of the Restated Articles and the amendment of the
Company's bylaws and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company, do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under, (iii) result in the creation of any lien, security interest,
charge or encumbrance upon the Company's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of the Company or any Subsidiary as
in effect on the date hereof, or any law, statute, rule or regulation to which
the Company or any Subsidiary is subject, or any agreement, instrument, order,
judgment or decree to which the Company or any Subsidiary is subject. Except as
set forth on the Restrictions Schedule, none of the Subsidiaries are subject to
any restrictions upon making loans or advances or paying dividends to,
transferring property to, or repaying any Indebted ness owed to, the Company or
another Subsidiary.
5E. Financial Statements. Attached hereto as the "Financial
--------------------
Statements Schedule" are the following financial statements:
(i) the unaudited consolidated balance sheet of the Company
and its Subsidiaries as of December 31, 1998, and the related statements of
income and cash flows (or the equivalent) for the respective twelve-month
period then ended; and
17
(ii) the unaudited consolidated balance sheet of the Company
and its Subsidiaries as of June 30, 1999 (the "Latest Balance Sheet"), and the
related statements of income and cash flows (or the equivalent) for the six-
month period then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject in the case of the unaudited financial statements to the absence of
footnote disclosure and changes resulting from normal year-end adjustments (none
of which would, alone or in the aggregate, be materially adverse to the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole).
5F. Absence of Undisclosed Liabilities. Except as set forth on the
----------------------------------
attached "Liabilities Schedule," the Company and its Subsidiaries do not have
any material obligation or liability (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to the Company or any
Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Closing, or any
material action or inaction at or prior to the Closing, or any state of material
facts existing at or prior to the Closing other than: (i) liabilities set forth
on the Latest Balance Sheet (including any notes thereto), (ii) liabilities and
obligations which have arisen after the date of the Latest Balance Sheet in the
ordinary course of business (none of which is a liability resulting from breach
of contract, breach of warranty, tort, infringement, claim or lawsuit) and (iii)
other liabilities and obligations expressly disclosed in the other Schedules to
this Agreement.
5G. No Material Adverse Change. Except as set forth on the attached
--------------------------
"Adverse Change Schedule," since the date of the Latest Balance Sheet, there has
been no material adverse change in the financial condition, operating results,
assets, operations, business prospects, employee relations or customer or
supplier relations of the Company and its Subsidiaries taken as a whole.
5H. Absence of Certain Developments.
-------------------------------
(i) Except as expressly contemplated by this Agreement or as set
forth on the attached "Developments Schedule," since the date of the Latest
Balance Sheet, neither the Company nor any Subsidiary have
(a) issued any notes, bonds or other debt securities or any
capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity securities;
18
(b) borrowed any amount or incurred or become subject to any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities under contracts entered into in the ordinary course of
business;
(c) discharged or satisfied any Lien or paid any obligation or
liability, other than current liabilities paid in the ordinary course of
business;
(d) declared or made any payment or distribution of cash or
other property to its stockholders with respect to its capital stock or other
equity securities or purchased or redeemed any shares of its capital stock or
other equity securities (including, without limitation, any warrants, options or
other rights to acquire its capital stock or other equity securities);
(e) mortgaged or pledged any of its properties or assets or
subjected them to any Lien, except Liens for current property taxes not yet due
and payable;
(f) sold, assigned or transferred any of its tangible assets,
except in the ordinary course of business, or canceled any debts or claims;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other intangible assets;
(h) suffered any extraordinary losses or waived any rights of
value, whether or not in the ordinary course of business or consistent with past
practice;
(i) made capital expenditures or commitments therefor that
aggregate in excess of $10,000;
(j) made any loans or advances to, guarantees for the benefit
of, or any Investments in, any Persons in excess of $10,000 in the aggregate;
(k) made any charitable contributions or pledges in excess of
$10,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss exceeding
in the aggregate $10,000, whether or not covered by insurance;
(m) made any Investment in or taken steps to incorporate any
Subsidiary; or
19
(n) entered into any other transaction other than in the
ordinary course of business.
(ii) Neither the Company nor any Subsidiary has at any time made any
payments for political contributions or made any bribes, kickback payments or
other illegal payments.
5I. Assets. Except as set forth on the attached "Assets Schedule,"
------
the Company and each Subsidiary have good and marketable title to, or, to the
knowledge of the Company, a valid leasehold interest in, the properties and
assets used by them, located on their premises or shown on the Latest Balance
Sheet or acquired thereafter, free and clear of all Liens, except for properties
and assets disposed of in the ordinary course of business since the date of the
Latest Balance Sheet and except for Liens disclosed on the Latest Balance Sheet
(including any notes thereto) and Liens for current property taxes not yet due
and payable. Other than ordinary wear and tear or except as described on the
Assets Schedule, the Company's and each Subsidiary's buildings, equipment and
other tangible assets are in good operating condition in all material respects
and are fit for use in the ordinary course of business. The Company and each
Subsidiary own, or have a valid leasehold interest in, all assets necessary for
the conduct of their respective businesses as presently conducted and as
presently proposed to be conducted.
5J. Tax Matters.
-----------
(i) Except as set forth on the attached "Taxes Schedule": the
Company, each Subsidiary and each Affiliated Group have filed all Tax Returns
which they are required to file under applicable laws and regulations; all such
Tax Returns are complete and correct in all material respects and have been
prepared in compliance with all applicable laws and regulations in all material
respects; the Company, each Subsidiary and each Affiliated Group in all material
respects have paid all Taxes due and owing by them (whether or not such Taxes
are required to be shown on a Tax Return) and have withheld and paid over to the
appropriate taxing authority all Taxes which they are required to withhold from
amounts paid or owing to any employee, stockholder, creditor or other third
party; neither the Company, any Subsidiary nor any Affiliated Group has waived
any statute of limitations with respect to any Taxes or agreed to any extension
of time with respect to any Tax assessment or deficiency; the accrual for Taxes
on the Latest Balance Sheet would be adequate to pay all Tax liabilities of the
Company and its Subsidiaries if their current tax year were treated as ending on
the date of the Latest Balance Sheet (excluding any amount recorded which is
attributable solely to timing differences between book and Tax income); since
the date of the Latest Balance Sheet, the Company and its Subsidiaries have not
incurred any liability for Taxes other than in the ordinary course of business;
the assessment of any additional Taxes for periods for which Tax Returns have
been filed by the Company, each Subsidiary and each Affiliated Group shall not
exceed the recorded liability therefor on the Latest Balance Sheet (excluding
any amount recorded which is attributable solely to timing differences between
book and Tax income); no foreign, federal, state or local tax audits or
administrative or judicial proceedings are pending or being conducted with
20
respect to the Company, any Subsidiary or any Affiliated Group, no information
related to Tax matters has been requested by any foreign, federal, state or
local taxing authority and no written notice indicating an intent to open an
audit or other review has been received by the Company from any foreign,
federal, state or local taxing authority; and there are no material unresolved
questions or claims concerning the Company's, any Subsidiary's or any Affiliated
Group Tax liability.
(ii) Neither the Company nor any of its Subsidiaries has made an
election under (S)341(f) of the Internal Revenue Code of 1986, as amended.
Neither the Company nor any Subsidiary is liable for the Taxes of another Person
that is not a Subsidiary in a material amount under (a) Treas. Reg. (S) 1.1502-6
(or comparable provisions of state, local or foreign law), (b) as a transferee
or successor, (c) by contract or indemnity or (d) otherwise. Neither the
Company nor any Subsidiary is a party to any tax sharing agreement. The
Company, each Subsidiary and each Affiliated Group have disclosed on their
federal income Tax Returns any position taken for which substantial authority
(within the meaning of IRC (S)6662(d)(2)(B)(i)) did not exist at the time the
return was filed. Neither the Company nor any Subsidiary has made any payments,
is obligated to make payments or is a party to an agreement that could obligate
it to make any payments that would not be deductible under IRC (S)280G.
(iii) "Tax" or "Taxes" means federal, state, county, local, foreign
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not. "Tax Return" means any return, information
report or filing with respect to Taxes, including any schedules attached thereto
and including any amendment thereof. "Affiliated Group" means any affiliated
group as defined in IRC (S)1504 that has filed a consolidated return for federal
income tax purposes (or any similar group under state, local or foreign law) for
a period during which any of the Company or any of its Subsidiaries was a
member.
5K. Contracts and Commitments; Significant Customers.
------------------------------------------------
(i) Except as expressly contemplated by this Agreement or as set
forth on the attached "Contracts Schedule" or the attached "Employee Benefits
Schedule," neither the Company nor any Subsidiary is a party to or bound by any
written or oral:
(a) pension, profitsharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or arrangement,
or any collective bargaining agreement or any other contract with any labor
union, or severance agreements, programs, policies or arrangements;
21
(b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or other basis
or contract relating to loans to officers, directors or Affiliates;
(c) contract under which the Company or Subsidiary has
advanced or loaned any other Person any amounts;
(d) agreement or indenture relating to borrowed money or other
Indebtedness or the mortgaging, pledging or otherwise placing a Lien on any
material asset or material group of assets of the Company and its
Subsidiaries;
(e) guarantee of any obligation;
(f) lease or agreement under which the Company or any
Subsidiary is lessee of or holds or operates any property, real or personal,
owned by any other party, except for any lease of real or personal property
under which the aggregate annual rental payments do not exceed $5,000;
(g) lease or agreement under which the Company or any
Subsidiary is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by the Company or any
Subsidiary;
(h) contract or group of related contracts with the same party
or group of affiliated parties the performance of which involves consideration
in excess of $5,000;
(i) assignment, license, indemnification or agreement with
respect to any intangible property (including, without limitation, any
Intellectual Property);
(j) warranty agreement with respect to its services rendered
or its products sold or leased;
(k) agreement under which it has granted any Person any
registration rights (including, without limitation, demand and piggyback
registration rights);
(l) sales, distribution or franchise agreement;
(m) agreement with a term of more than six months which is not
terminable by the Company or any Subsidiary upon less than 30 days notice
without penalty;
22
(n) contract, agreement or other arrangement with any officer,
director, shareholder, employee or Affiliate, or any Affiliate of any officer,
director, shareholder or employee;
(o) contract or agreement prohibiting it from freely engaging
in any business or competing anywhere in the world; or
(p) any other agreement which is material to its operations
and business prospects or involves a consideration in excess of $5,000
annually.
(ii) All of the contracts, agreements and instruments set forth on
the Contracts Schedule are valid, binding and enforceable in all material
respects against the Company in accordance with their respective terms and, to
the Company's knowledge the other parties thereto, except, in any case, as such
enforceability is limited bankruptcy, insolvency, moratorium or other laws
affecting the enforcement of creditors' rights generally, and by general
equitable principles. The Company and each Subsidiary have performed all
material obligations required to be performed by them and are not in default
under or in breach of nor in receipt of any claim of default or breach under any
contract, agreement or instrument; no event has occurred which with the passage
of time or the giving of notice or both would result in a material default,
breach or event of noncompliance by the Company or any Subsidiary under any
contract, agreement or instrument; neither the Company nor any Subsidiary has
any present expectation or intention of not fully performing all such
obligations; neither the Company nor any Subsidiary has knowledge of any breach
or anticipated breach by the other parties to any contract, agreement,
instrument or commitment; and neither the Company nor any Subsidiary is a party
to any materially adverse contract or commitment.
(iii) The Purchasers' special counsel has been supplied with a true
and correct copy of each of the written instruments, plans, contracts and
agreements and an accurate description of each of the oral arrangements,
contracts and agreements which are referred to on the Contracts Schedule,
together with all amendments, waivers or other changes thereto.
(iv) The attached "Significant Customers Schedule" sets forth a
complete and accurate list of all Significant Customers. For purposes of this
Agreement, "Significant Customers" are the twenty (20) customers that have
effected the most purchases, in dollar terms, from the Company during each of
the past four (4) fiscal quarters. Except to the extent set forth on the
Significant Customers Schedule, none of the Company's Significant Customers has
cancelled or substantially reduced or, to the knowledge of the Company, is
currently attempting or threatening to cancel or substantially reduce, any
purchases from the Company.
5L. Intellectual Property Rights.
----------------------------
(i) The attached "Intellectual Property Schedule" contains a
complete and accurate list of all (a) patented or registered Intellectual
Property Rights owned or used by the
23
Company or any Subsidiary, (b) pending patent applications and applications for
registrations of other Intellectual Property Rights filed by the Company or any
Subsidiary, (c) unregistered trade names and corporate names owned or used by
the Company or any Subsidiary and (d) unregistered trademarks, service marks,
copyrights, mask works and computer software owned or used by the Company or any
Subsidiary. The Intellectual Property Schedule also contains a complete and
accurate list of all licenses and other rights granted by the Company or any
Subsidiary to any third party with respect to any Intellectual Property Rights
and all licenses and other rights granted by any third party to the Company or
any Subsidiary with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. Except as set forth on the
Intellectual Property Schedule, the Company or one of its Subsidiaries owns all
right, title and interest to, or has the right to use pursuant to a valid
license, all Intellectual Property Rights necessary for the operation of the
businesses of the Company and its Subsidiaries as presently conducted and as
presently proposed to be conducted, free and clear of all Liens. Except as set
forth on the Intellectual Property Schedule, to the Company's knowledge the loss
or expiration of any Intellectual Property Right or related group of
Intellectual Property Rights owned or used by the Company or any Subsidiary is
not threatened, pending or reasonably foreseeable.
(ii) Except as set forth on the Intellectual Property Schedule, (a)
the Company and its Subsidiaries own all right, title and interest in and to all
of the Intellectual Property Rights listed on such schedule, free and clear of
all Liens, (b) there have been no claims made against the Company or any
Subsidiary asserting the invalidity, misuse or unenforceability of any of such
Intellectual Property Rights, and there are no grounds for the same, (c) neither
the Company nor any Subsidiary has received any notices of, and is not aware of
any facts which indicate a likelihood of, any infringement or misappropriation
by, or conflict with, any third party with respect to such Intellectual Property
Rights (including, without limitation, any demand or request that the Company or
any Subsidiary license any rights from a third party), (d) to the Company's
knowledge, the conduct of the Company's and each Subsidiary's business has not
infringed, misappropriated or conflicted with and does not infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons, nor would any future conduct as presently contemplated infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons and (e) to the best of the Company's knowledge, the Intellectual
Property Rights owned by or licensed to the Company or any Subsidiary have not
been infringed, misappropriated or conflicted by other Persons. Except as set
forth in the Intellectual Property Schedule, the transactions contemplated by
this Agreement shall have no material adverse effect on the Company's or any
Subsidiary's right, title and interest in and to the Intellectual Property
Rights listed on the Intellectual Property Schedule.
5M. Litigation, etc. Except as set forth on the attached "Litigation
---------------
Schedule," there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against or
affecting the Company or any Subsidiary (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company and its Subsidiaries with respect to their
businesses or proposed
24
business activities), or pending or threatened by the Company or any Subsidiary
against any third party, at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality (including,
without limitation, any actions, suit, proceedings or investigations with
respect to the transactions contemplated by this Agreement); nor has there been
any such actions, suits, proceedings, orders, investigations or claims pending
against or affecting the Company or any Subsidiary during the past 3 years;
neither the Company nor any Subsidiary is subject to any arbitration proceedings
under collective bargaining agreements or otherwise or, to the best of the
Company's knowledge, any governmental investigations or inquiries (including,
without limitation, inquiries as to the qualification to hold or receive any
license or permit); and, to the best of the Company's knowledge, there is no
basis for any of the foregoing. Neither the Company nor any Subsidiary is
subject to any judgment, order or decree of any court or other governmental
agency.
5N. Brokerage. Except as set forth on the attached "Brokerage
---------
Schedule," there are no claims for brokerage commissions, finders' fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement binding upon the Company or any
Subsidiary. The Company shall pay, and hold each Purchaser harmless against,
any liability, loss or expense (including, without limitation, reasonable
attorneys' fees and out-of-pocket expenses) arising in connection with any such
claim.
5O. Governmental Consent, etc. No permit, consent, approval or
-------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as set forth on the attached "Consents Schedule" and except as
expressly contemplated herein or in the exhibits hereto.
5P. Insurance. The attached "Insurance Schedule" contains a
---------
description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and businesses, and each
such policy is in full force and effect as of the Closing. Neither the Company
nor any Subsidiary is in default with respect to its obligations under any
insurance policy maintained by it, and neither the Company nor any Subsidiary
has been denied insurance coverage. The insurance coverage of the Company and
its Subsidiaries is customary for corporations of similar size engaged in
similar lines of business. Except as set forth on the Insurance Schedule, the
Company and its Subsidiaries do not have any self-insurance or co-insurance
programs, and the reserves set forth on the Latest Balance Sheet are adequate to
cover all anticipated liabilities with respect to any such self-insurance or co-
insurance programs.
5Q. Employees. Except as set forth on the attached "Employees
---------
Schedule," the Company is not aware that any executive or key employee of the
Company or any Subsidiary or any group of employees of the Company or any
Subsidiary has any plans to terminate employment with
25
the Company or any Subsidiary. The Company and each Subsidiary have complied in
all material respects with all laws relating to the employment of labor
(including, without limitation, provisions thereof relating to wages, hours,
equal opportunity, collective bargaining and the payment of social security and
other taxes), and the Company is not aware that it or any Subsidiary has any
material labor relations problems (including, without limitation, any union
organization activities, threatened or actual strikes or work stoppages or
material grievances). Neither the Company, its Subsidiaries nor, to the best of
the Company's knowledge, any of their employees is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar agreements
relating to, affecting or in conflict with the present or proposed business
activities of the Company and its Subsidiaries, except for agreements between
the Company and its present and former employees.
5R. ERISA.
-----
(i) Multiemployer Plans. Except as set forth on the "Employee
-------------------
Benefits Schedule," the Company does not have any obligation to contribute to
(or any other liability, including current or potential withdrawal liability,
with respect to) any "multiemployer plan" (as defined in Section 3(37) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")).
(ii) Retiree Welfare Plans. Except as set forth on the "Employee
---------------------
Benefits Schedule," the Company does not maintain or have any obligation to
contribute to (or any other liability with respect to) any plan or arrangement
whether or not terminated, which provides medical, health, life insurance or
other welfare-type benefits for current or future retired or terminated
employees (except for limited continued medical benefit coverage required to be
provided under Section 4980B of the IRC or as required under applicable state
law).
(iii) Defined Benefit Plans. Except as set forth on the "Employee
---------------------
Benefits Schedule," the Company does not maintain, contribute to or have any
liability under (or with respect to) any employee plan which is a tax-qualified
"defined benefit plan" (as defined in Section 3(35) of ERISA), whether or not
terminated.
(iv) Defined Contribution Plans. Except as set forth on the
--------------------------
"Employee Benefits Schedule," the Company does not maintain, contribute to or
have any liability under (or with respect to) any employee plan which is a tax-
qualified "defined contribution plan" (as defined in Section 3(34) of ERISA)
(the"Profit Sharing Plan"), whether or not terminated.
(v) Other Plans. Except as set forth in the "Employee Benefits
-----------
Schedule, the Company does not maintain, contribute to or have any liability
under (or with respect to) any plan or arrangement providing benefits to current
or former employees, including any bonus plan, plan for deferred compensation,
employee health or other welfare benefit plan or other arrangement,
26
whether or not terminated. All plans and arrangements set forth on the "Employee
Benefits Schedule" are referred to as the "Plans."
(vi) The Company. For purposes of this paragraph 5R, the term
-----------
"Company" includes all organizations under common control with the Company
pursuant to Section 414(b) or (c) of the IRC.
(vii) Payments and Accruals. With respect to the Plans, all required
---------------------
or recommended (in accordance with historical practices) payments, premiums,
contributions, reimbursements or accruals for all periods (or partial periods)
ending prior to or as of the Closing shall have been made or properly accrued on
the Latest Balance Sheet. None of the Plans has any material unfunded
liabilities which are not reflected on the Latest Balance Sheet.
(viii) Compliance. The Plans and all related trusts, insurance
----------
contracts and funds have been maintained, funded and administered in compliance
in all material respects with the applicable provisions of ERISA, the IRC and
other applicable laws. Neither the Company nor any trustee or administrator of
any Plan has engaged in any transaction with respect to the Plans which could
subject the Company or any trustee or administrator or the Plans, or any party
dealing with any such Plan, nor do the transactions contemplated by this
Agreement constitute transactions which could subject any such party, to either
a civil penalty assessed pursuant to Section 502(i) of ERISA or the tax or
penalty on prohibited transactions imposed by Section 4975 of the IRC. No
actions, suits or claims with respect to the assets of the Plans (other than
routine claims for benefits) are pending or, to the Company's knowledge,
threatened which could result in or subject the Company to any liability, and,
to the Company's knowledge, there are no circumstances which could give rise to
or be expected to give rise to any such actions, suits or claims.
(ix) Correct Copies. The Company has provided the Purchasers with
--------------
true and complete copies of all documents pursuant to which the Plans are
maintained and administered and the most recent annual reports (Form 5500 and
attachments), if any, for the Plans.
5S. Compliance with Laws. Except as set forth on the attached
--------------------
"Compliance Schedule," neither the Company nor any Subsidiary is in violation of
any law or any governmental regulation or requirement which violation has had or
would reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole, and neither the Company
nor any Subsidiary has received notice of any such violation. Except as set
forth on the Compliance Schedule, neither the Company nor any Subsidiary is
subject to, or has reason to believe it may become subject to, any liability
(contingent or otherwise) or corrective or remedial obligation arising under any
federal, state, local or foreign law, rule or regulation (including the common
law) relating to or regulating health, safety, pollution or the protection of
the environment ("Environmental Laws"). Without limiting the generality of the
foregoing, (i) the Company and each
27
Subsidiary have obtained all permits, licenses and authorizations required
under, and have complied in all respects with, all Environmental Laws, (ii) no
notice has been received by the Company or any Subsidiary regarding any
violation of, or any claim, liability or corrective or remedial obligation
under, any Environmental Laws and (iii) to the Company's knowledge, no facts or
circumstances exist with respect to the past or present operations or facilities
of the Company or any Subsidiary which would give rise to a liability or
corrective or remedial obligation under any Environmental Laws.
5T. Affiliated Transactions. Except as set forth on the attached
-----------------------
"Affiliated Transactions Schedule," no officer, director, employee, shareholder
or Affiliate of the Company or any Subsidiary or, to the Company's knowledge,
any individual related by blood, marriage or adoption to any such individual or,
to the Company's knowledge, any entity in which any such Person or individual
owns any beneficial interest, is a party to any agreement, contract, commitment
or transaction with the Company or any Subsidiary or has any material interest
in any material property used by the Company or any Subsidiary.
5U. Web Site. To the Company's knowledge, the ownership, operation
--------
and use of the Web Site or any User Information by the Company and its
Subsidiaries has not violated any applicable laws or regulations and neither the
Company nor any of its Subsidiaries has breached any contractual or other legal
obligations relating to the Web Site or any User Information (including any
obligations to users of the Web Site). "Web Site" shall mean the web site
having the URL address "▇▇▇.▇▇▇▇▇▇▇▇▇▇.▇▇▇" and any other web site owned and
operated by the Company or any of its Subsidiaries, as such web sites may have
changed from time to time. "User Information" shall mean information of any
type regarding users of the Web Site (including, without limitation, information
supplied by such users).
5V. Disclosure. Neither this Agreement nor any of the exhibits,
----------
schedules, closing certificates or attachments hereto contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein, in light of the circumstances under which
it is made, not misleading. There is no fact which the Company has not disclosed
to the Purchasers in writing and of which any of its officers, directors or
general managers is aware and which has had or would reasonably be expected to
have a material adverse effect upon the financial condition, operating results,
assets, customer or supplier relations, employee relations or business prospects
of the Company and its Subsidiaries taken as a whole.
5W. Knowledge. As used in this Section 5, the terms "knowledge" or
---------
"aware" shall mean and include (i) the actual knowledge or awareness of the
Company and its Subsidiaries (which shall include the actual knowledge and
awareness of the officers, directors and the general managers of each facility
of the Company and its Subsidiaries) and (ii) the knowledge or awareness which a
prudent business person would have obtained in the conduct of his business after
making reasonable inquiry and reasonable diligence with respect to the
particular matter in question.
28
Section 6. Definitions.
-----------
6A. Definitions. For the purposes of this Agreement, the following
-----------
terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Indebtedness" means at a particular time, without duplication, (i)
------------
any indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied
obligation for "withdrawal liability" to a "multiemployer plan" as such terms
are defined under ERISA.
"Intellectual Property Rights" means all (i) patents, patent
----------------------------
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights and (viii) copies and tangible
embodiments thereof (in whatever form or medium).
"Investment" as applied to any Person means (i) any direct or
----------
indirect purchase or other acquisition by such Person of any notes, obligations
(other than trade payables or other
29
liabilities incurred in the ordinary course of business payable within 90 days
of incurrence), instruments, stock, securities or ownership interest (including
partnership interests and joint venture interests) of any other Person and (ii)
any capital contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
---
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
---
"Liens" means any mortgage, pledge, security interest, encumbrance,
-----
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any Subsidiary or any Affiliate,
any filing or agreement to file a financing statement as debtor under the
Uniform Commercial Code or any similar statute other than to reflect ownership
by a third party of property leased to the Company or any Subsidiaries under a
lease which is not in the nature of a conditional sale or title retention
agreement, or any subordination arrangement in favor of another Person (other
than any subordination arising in the ordinary course of business).
"Officer's Certificate" means a certificate signed by the Company's
---------------------
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
necessary in order to permit him to verify the accuracy of the information set
forth in such certificate and (ii) to the best of such officer's knowledge, such
certificate is accurate and complete in all material respects.
"Permitted Liens" means:
---------------
(i) tax liens with respect to taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established in accordance with generally
accepted accounting principles, consistently applied;
(ii) deposits or pledges made in connection with, or to secure
payment of, utilities or similar services, workers' compensation, unemployment
insurance, old age pensions or other social security obligations;
(iii) purchase money security interests in any property acquired by
the Company or any Subsidiary to the extent permitted by this Agreement;
(iv) interests or title of a lessor under any lease permitted by
this Agreement;
30
(v) mechanics', materialmen's or contractors' liens or
encumbrances or any similar lien or restriction for amounts not yet due and
payable;
(vi) easements, rights-of-way, restrictions and other similar
charges and encumbrances not interfering with the ordinary conduct of the
business of the Company and its Subsidiaries or detracting from the value of
the assets of the Company and its Subsidiaries;
(vii) liens outstanding on the date hereof which secure
Indebtedness and which are described in the schedules to this Agreement.
"Person" means an individual, a partnership, a corporation, a
------
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Restricted Securities" means (i) the Series B Preferred issued
---------------------
hereunder, (ii) the Warrant issued hereunder, (iii) the Note issued hereunder,
(iv) the Common Stock issued upon conversion of Series B Preferred or upon
exercise of the Warrant and (v) any securities issued with respect to the
securities referred to in clauses (i), (ii), (iii) or (iv) above by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) been distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or become eligible for sale pursuant to Rule 144(k) (or any
similar provision then in force) under the Securities Act or (c) been otherwise
transferred and new certificates for them not bearing the Securities Act legend
set forth in paragraph 7C have been delivered by the Company in accordance with
paragraph 4(ii). Whenever any particular securities cease to be Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new securities of like tenor not bearing a Securities Act
legend of the character set forth in paragraph 7C.
"Securities Act" means the Securities Act of 1933, as amended, or
--------------
any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body
----------------------------------
or agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, or any similar federal law then in force.
31
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Treasury Regulations" means the United States Treasury Regulations
--------------------
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
"Underlying Common Stock" means (i) the Common Stock issued or
-----------------------
issuable upon conversion of the Series B Preferred or upon exercise of the
Warrant and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement only, any
Person who holds Series B Preferred or Warrant shall be deemed to be the holder
of the Underlying Common Stock obtainable upon conversion of the Series B
Preferred or exercise of the Warrants in connection with the transfer thereof or
otherwise regardless of any restriction or limitation on the conversion of the
Series B Preferred or exercise of the Warrant, such Underlying Common Stock
shall be deemed to be in existence, and such Person shall be entitled to
exercise the rights of a holder of Underlying Common Stock hereunder. As to any
particular shares of Underlying Common Stock, such shares shall cease to be
Underlying Common Stock when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar provision
then in force) or (c) repurchased by the Company or any Subsidiary.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
-----------------------
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
32
Section 7. Miscellaneous.
-------------
7A. Expense. The Company and the Purchasers shall each bear their
-------
own fees, costs and expenses incurred on their behalf with respect to this
Agreement and the transactions contemplated hereby and any amendments or waivers
thereto.
7B. Remedies. Each holder of Series B Preferred and Underlying
--------
Common Stock shall have all rights and remedies set forth in this Agreement,
Restated Articles and all rights and remedies which such holders have been
granted at any time under any other agreement or contract and all of the rights
which such holders have under any law. Any Person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
7C. Purchaser's Investment Representations. Each Purchaser hereby
--------------------------------------
represents that it is an "accredited investor" as defined in Rule 501(a)
promulgated under the Securities Act and that it is acquiring the Restricted
Securities purchased hereunder or acquired pursuant hereto for its own account
with the present intention of holding such securities for purposes of
investment, and that it has no intention of selling such securities in a public
distribution in violation of the federal securities laws or any applicable state
securities laws; provided that nothing contained herein shall prevent any
Purchaser and subsequent holders of Restricted Securities from transferring such
securities in compliance with the provisions of Section 4 hereof. Each
certificate or instrument representing Restricted Securities shall be imprinted
with a legend in substantially the following form:
"The securities represented by this certificate were originally issued on
August 6, 1999 and have not been registered under the Securities Act of
1933, as amended (the "Act"), and may not be transferred, sold or pledged
without registration under the Act, unless otherwise exempt from such
registration requirements. The transfer of the securities represented by
this certificate is subject to the conditions specified in the Purchase
Agreement, dated as of August 6, 1999 and as amended and modified from time
to time, between the issuer (the "Company") and certain investors, and the
Company reserves the right to refuse the transfer of such securities until
such conditions have been fulfilled with respect to such transfer. A copy
of such conditions shall be furnished by the Company to the holder hereof
upon written request and without charge."
7D. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of a majority of the outstanding Series B Preferred;
33
provided that if there is no Series B Preferred outstanding, the provisions of
this Agreement may be amended and the Company may take any action herein
prohibited, only if the Company has obtained the written consent of the holders
of a majority of the Underlying Common Stock. No other course of dealing between
the Company and the holder of any Series B Preferred, Warrant, Note or
Underlying Common Stock or any delay in exercising any rights hereunder or under
the Restated Articles shall operate as a waiver of any rights of any such
holders. For purposes of this Agreement, shares of Series B Preferred or
Underlying Common Stock held by the Company or any Subsidiaries shall not be
deemed to be outstanding.
7E. Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by any Purchaser or on its behalf.
7F. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for any Purchaser's benefit as a
purchaser or holder of Series B Preferred, the Warrant, Note or Underlying
Common Stock are also for the benefit of, and enforceable by, any subsequent
holder of such Series B Preferred, such Warrant, such Note or such Underlying
Common Stock.
7G. Generally Accepted Accounting Principles. Where any accounting
----------------------------------------
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied.
7H. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7I. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts (including facsimile copies), any one of which need not
contain the signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement.
7J. Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this
34
Agreement. The use of the word "including" in this Agreement shall be by way of
example rather than by limitation.
7K. Governing Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Delaware, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
7L. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to each Purchaser at the address indicated on the
Schedule of Purchasers and to the Company at the address indicated below:
Latitude 90, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇.
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: Executive Financial Officer
with a copy to:
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇/▇▇/ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7M. No Strict Construction. The parties hereto have participated
----------------------
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
7N. Arbitration. Each of the parties hereto agrees that in the event
-----------
of any dispute
35
arising between the parties arising out of or relating to this Agreement or its
breach, such dispute shall be resolved pursuant to the pre-dispute arbitration
agreement attached hereto as Exhibit G.
---------
* * * * * *
36
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
LATITUDE 90, INC.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇
___________________________
Name: ▇▇▇▇ ▇. ▇▇▇▇▇
Title: President and CEO
PURCHASERS:
By: ____________________________
Name:
Title:
[Signature Page to Purchase Agreement]
LATITUDE 90, INC.
Amendment No. 1 to
------------------
Shareholders Agreement
----------------------
This Amendment No. 1 (the "Amendment") is made as of August __, 1999 to the
Shareholders Agreement (the "Agreement") made and entered into on August 6,
1999, among Latitude 90, Inc., a California corporation (the "Company"), and the
Investors (as defined in the Agreement) (the "Investors").
Recitals
--------
WHEREAS, the Company has entered into the Agreement, which among other
things, provided for the sale and issuance of the Company's Series B Preferred
Stock and a warrant to purchase shares of the Company's Common Stock to the
Purchasers named therein;
WHEREAS, it was the original intention of the Company, the Purchasers and
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ to have the Company and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ enter into a
Securities Purchase Agreement (the "▇▇▇▇▇▇▇▇▇ Agreement") concurrently with the
Initial Closing (as defined in the Agreement) under the Agreement;
WHEREAS, pursuant to the ▇▇▇▇▇▇▇▇▇ Agreement, the Company would issue and
sell a warrant (the "▇▇▇▇▇▇▇▇▇ Warrant") to purchase 530,946 shares of the
Company's Common Stock at a purchase price for the ▇▇▇▇▇▇▇▇▇ Warrant of
$5,309.46; and
WHEREAS, in connection with the ▇▇▇▇▇▇▇▇▇ Agreement and the issuance of the
▇▇▇▇▇▇▇▇▇ Warrant thereunder, the Company and the Purchasers have determined
that the Agreement requires certain amendments.
NOW, THEREFORE, the Company and the Investors agree as follows:
Agreement
---------
1. Amendment to Agreement. Effective as of the Initial Closing (as
----------------------
defined in the Agreement), the parties agree that Section 7(a)(iii) of the
Agreement is amended and restated in its entirety as follows:
"(iii) any issuance (other than (i) to The Roman Arch Fund L.P. or
The Roman Arch Fund II L.P. pursuant to the terms of the letter agreement
with the Company dated as of June 7, 1999 and (ii) for payment in kind
dividends to the holder of Series B Preferred Stock) of Series B Preferred
Stock that would result in more than 3,398,054 (subject to any stock split,
stock dividend, recapitalization or otherwise) of such shares being
outstanding."
2. General Provisions.
------------------
(a) Governing Law. This Amendment shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
(b) Full Force and Effect. Except as amended hereby, the Agreement
---------------------
shall remain in full force and effect.
(c) Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute on instrument.
(d) Captions. The captions herein are included for convenience of
--------
reference only and shall be ignored in the construction or interpretation
hereof.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered as of the day and year first written above.
COMPANY:
Latitude 90, Inc.
By: ____________________
Name:
Title:
INVESTORS:
By: ____________________
Name:
Title:
[Signature Page to Amendment No. 1 to Shareholders Agreement]
LATITUDE 90, INC.
Amendment No. 2 to
------------------
Shareholders Agreement
----------------------
This Amendment No. 2 (the "Amendment") is made as of September __, 1999 to
the Shareholders Agreement (the "Agreement") made and entered into on August 6,
1999, as amended, among Latitude 90, Inc., a California corporation (the
"Company"), and the Investors (as defined in the Agreement) (the "Investors").
Recitals
--------
WHEREAS, the Company has entered into the Agreement, which among other
things, provided for the sale and issuance of the Company's Series B Preferred
Stock and a warrant to purchase shares of the Company's Common Stock to the
Purchasers named therein;
WHEREAS, the Company now desires to sell and issue to additional investors
(each, a "Subsequent Sale") shares of the Series B Preferred in one or more
Subsequent Closings (as defined in the Agreement) under the Agreement;
WHEREAS, in connection with the contemplated Subsequent Sales and the
issuance of share of the Series B Preferred thereunder, the Company and the
Purchasers have determined that the Agreement requires certain amendments.
NOW, THEREFORE, the Company and the Investors agree as follows:
Agreement
---------
1. Amendment to Agreement. The parties agree that Section 7(a)(iii) of
----------------------
the Agreement is amended and restated in its entirety as follows:
"(iii) any issuance (other than (i) to The Roman Arch Fund L.P. or
The Roman Arch Fund II L.P. pursuant to the terms of the letter agreement
with the Company dated as of June 7, 1999 and (ii) for payment in kind
dividends to the holder of Series B Preferred Stock) of Series B Preferred
Stock that would result in more than _________ (subject to any stock split,
stock dividend, recapitalization or otherwise) of such shares being
outstanding."
2. General Provisions.
------------------
(a) Governing Law. This Amendment shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
(b) Full Force and Effect. Except as amended hereby, the Agreement
---------------------
shall remain in full force and effect.
(c) Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute on instrument.
(d) Captions. The captions herein are included for convenience of
--------
reference only and shall be ignored in the construction or interpretation
hereof.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered as of the day and year first written above.
COMPANY:
Latitude 90, Inc.
By: ____________________
Name:
Title:
INVESTORS:
By: ____________________
Name:
Title:
[Signature Page to Amendment No. 2 to Shareholders Agreement]