EXHIBIT 1
PREFERRED STOCK INVESTMENT AGREEMENT
AGREEMENT dated as of September 30, 1997 between Interleaf, Inc. (the "Company")
and the investor whose name is set forth at the foot of this Agreement (the
"Investor").
The parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
SECTION I.1 PURCHASE AND SALE OF PREFERRED STOCK. Upon the following terms
and conditions, the Company shall issue and sell to the Investor shares of the
Company's 6% Convertible Preferred Stock (the "Shares") having the rights,
designations and preferences set forth in Schedule I hereto, and the Investor
shall purchase from the Company the number of Shares designated on the signature
page hereof.
SECTION I.2 PURCHASE PRICE. The purchase price for the Shares (the
"Purchase Price") shall be $1,000 per share.
SECTION I.3 THE CLOSING.
(a) The closing of the purchase and sale of the Shares (the "Closing"),
shall take place at the offices of the Company, at 10:00 a.m., local time on
the later of the following: (i) the date on which the last to be fulfilled
or waived of the conditions set forth in Article IV hereof and applicable to
the Closing shall be fulfilled or waived in accordance herewith, or (ii)
such other time and place and/or on such other date as the Investor and the
Company may agree but in no event later than September 30, 1997. The date on
which the Closing occurs is referred to herein as the "Closing Date."
(b) On the Closing Date, the Company shall deliver to the Investor
certificates representing the number of Shares being purchased by the
Investor, registered in the name of the Investor, or deposit such Shares
into accounts designated by the Investor, and the Investor shall deliver to
the Company the Purchase Price for such Shares by cashier's check or wire
transfer in immediately available funds to such account as shall be
designated in writing by the Company. The Investor shall also deliver, as a
condition to the Closing, a Purchaser's Questionnaire in the form supplied
by the Company. In addition, each party shall deliver all documents,
instruments and writings required to be delivered by such party pursuant to
this Agreement at or prior to the Closing.
SECTION I.4 COVENANT TO REGISTER.
(a) For purposes of this Section, the following definitions shall apply:
(i) The terms "register," "registered," and "registration" refer to a
registration under the Securities Act of 1933, as amended (the "Act"),
effected by preparing and filing a registration statement in compliance
with the Act, and the declaration or ordering of effectiveness of such
registration statement, document or amendment thereto.
(ii) The term "Registrable Securities" does not include the Shares
but means (A) the shares of common stock issued or issuable upon
conversion of the Shares, or (B) any securities of the Company or
securities of any successor corporation issued pursuant to the provisions
of Schedule I hereto or issuable upon the conversion or exercise of any
warrant, right or other security that is issued as a dividend or other
distribution with respect to, or in exchange for or in replacement of the
Shares, which in either case (i) have not been resold pursuant to an
effective registration statement or pursuant to Rule 144 under the Act or
(ii) may not be resold pursuant to Rule 144(k) under the Act. For
purposes of this Agreement, securities will be considered ineligible for
resale pursuant to Rule 144(k) under the Act unless the Company's
transfer agent has accepted an instruction from the Company specifying
that such securities are eligible for sale pursuant to Rule 144(k).
(iii) The term "holder of Registrable Securities" includes any person
who holds Shares which are convertible into Registrable Securities.
(b) (i) The Company shall, as expeditiously as possible following the
Closing, file a registration statement on Form S-3, or if Form S-3 is not
then available, another appropriate form, covering the resale of all the
Registrable Securities under Rule 415. The number of shares of Common Stock
initially included in such registration statement shall be not less than
150% of the number which would be issuable upon conversion of the Shares if
all thereof were to be converted at a conversion price equal to the average
closing price of the Common Stock during the five trading days prior to the
effective date of the registration statement. The Company shall use its best
efforts to cause such registration statement to become effective by the 90th
calendar day after the Closing Date (the "Initial Registration"). In the
event such registration statement is not so declared effective or if at any
time thereafter it does not include at least 120% of the number of
Registrable Securities which would then be issuable upon conversion of the
6% Preferred (or any successor security) at the conversion price then in
effect, any holder of Registrable Securities shall have the right to require
by notice in writing that the Company register all or any part of the
Registrable Securities held by such holder (a "Demand Registration") and the
Company shall thereupon effect such registration in accordance herewith
(which may include adding such shares to an existing shelf registration).
The parties agree that if the holder of Registrable Securities demands
registration of less than all of the Registrable Securities, the Company, at
its option, may nevertheless file a registration statement covering all of
the Registrable Securities. If such registration statement is declared
effective with respect to all Registrable Securities, then so long as the
Company is in compliance with its obligations under Subsection (d)(i)
through (v) hereof, the demand registration rights granted pursuant to this
Subsection (b) (i) shall not be applicable. If such registration statement
is not declared effective with respect to all Registrable Securities, or if
the Company is not in compliance with said obligations, the demand
registration rights described herein shall remain in effect. The Company
shall provide holders of Registrable Securities reasonable opportunity to
review any such registration statement or amendment or supplement thereto
prior to the filing thereof. Nothing herein shall require the Company to
postpone filing the registration statement. If the Registrable Securities
are registered initially on a form other than Form S-3, and thereafter the
Company becomes eligible to use Form S-3, the Company will then take all
action permitted by Rule 401(e) under the Act to utilize the requirements of
Form S-3 thereafter.
(ii) The Company shall not be obligated to effect Demand Registration
under Subsection (b)(i) if all of the Registrable Securities held by the
holder of Registrable Securities which are demanded to be covered by the
Demand Registration are, at the time of such demand, included in an
effective registration statement and the Company is in compliance with
its obligations under Subsection (d) (i) through (v) hereof.
(iii) The Company may suspend the effectiveness of any such
registration effected pursuant to this Subsection (b) in the event, and
for such period of time as, such a suspension is required by the rules
and regulations of the Securities and Exchange Commission ("SEC"), and
may suspend use of the prospectus included in the Registration Statement
if such prospectus ceases to meet the requirements of Section 10 of the
Act. The Company will immediately advise the holders of the registered
securities of any such suspension, and will use its best efforts to cause
such suspension to terminate at the earliest possible date. The Investor
agrees that following receipt of any such notice, and until such
suspension is terminated, the Investor will not make use of the suspended
prospectus and will make no sales requiring delivery of such prospectus.
(iv) If the registration statement covering the required number of
Registrable Securities is not effective by the 90th calendar day after
the Closing Date, then the Company shall pay the Investor in cash an
amount equal to 3% of the total Purchase Price of the Shares purchased by
the Investor for each 30 day period thereafter until such registration
statement is effective (pro-
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rata as to a period of less than 30 days). An amount equal to 3% of the
total Purchase Price of Shares and any Registrable Securities then held
by Investor shall also be paid to the Investor in cash with respect to
any period in excess of 30 days that the effectiveness of the
Registration Statement or use of the prospectus is suspended as set forth
in Section 1.4 (b)(iii) or the prospectus is otherwise unavailable for
use by sellers of Registrable Securities. Any payment hereunder shall be
made not later than ten days after the end of the 30-day period with
respect to which such payment is due. The "Purchase Price" of Registrable
Securities shall be, in the case of Registrable Securities derived from
conversion or substitution of Shares, the Purchase Price of such Shares.
This subsection is in addition to the provisions of Section 7.2(a)
hereof.
(c) If the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the
Investor) any of its stock or other securities under the Act in connection
with a public offering of such securities (other than a registration on Form
▇-▇, ▇▇▇▇ ▇-▇ or other limited purpose form) and all Registrable Securities
have not theretofore been included in a registration statement under
Subsection (b) which remains effective, the Company shall, at such time,
promptly give all holders of Registrable Securities written notice of such
registration. Upon the written request of any holder of Registrable
Securities given within twenty (20) days after receipt of such notice by the
holder of Registrable Securities, the Company shall use its best efforts to
cause to be registered under the Act all Registrable Securities that such
holder of Registrable Securities requests to be registered. However, the
Company shall have no obligation under this Subsection (c) to the extent
that, with respect to a public offering registration, the managing
underwriter of such public offering reasonably notifies such holder(s) in
writing of its determination that the Registrable Securities or a portion
thereof should be excluded therefrom. The rights of the Investor and the
obligations of the Company under this subsection are subject to any prior
registration rights of other shareholders of the Company which are disclosed
in Exhibit A hereto.
(d) Whenever required under this Section to effect the registration of
any Registrable Securities, including, without limitation, the Initial
Registration, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause
such registration to become effective as provided in Section 1.4(b)(i),
and keep such registration statement effective for so long as any holder
of Registrable Securities desires to dispose of the securities covered by
such registration statement, or, if earlier, until such Registrable
Securities may be sold under Rule 144(k) (provided that the Company's
transfer agent has accepted an instruction from the Company to such
effect).
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with
such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities
covered by such registration statement and notify the holders of the
filing and effectiveness of such registration statement and any
amendments or supplements.
(iii) Furnish to each holder of Registrable Securities such numbers
of copies of a current prospectus conforming with the requirements of the
Act, copies of the registration statement, any amendment or supplement
thereto and any documents incorporated by reference therein and such
other documents as such holder of Registrable Securities may reasonably
require in order to facilitate the disposition of Registrable Securities
owned by such holder of Registrable Securities.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such securities or "Blue
Sky" laws of such jurisdictions as shall be reasonably requested by a
holder of Registrable Securities and keep such registration or
qualification effective as long as required to permit sale of Registrable
Securities thereunder, provided that the
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Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service
of process in any such states or jurisdictions.
(v) Notify each holder of Registrable Securities immediately of the
happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and use its best
efforts to promptly update and/or correct such prospectus.
(vi) Furnish to each holder of Registrable Securities included
therein (1) an opinion of counsel to the Company covering compliance of
the registration statement, as to form, with the requirements of the Act
and the rules thereunder, and covering the matters covered in the opinion
filed as an exhibit to the registration statement, and (2) a "cold
comfort" letter or letters of the Company's independent public
accountants in the form and of the substance customarily supplied to
underwriters in connection with a public offering.
(vii) Use its best efforts to list the Registrable Securities covered
by such registration statement with any national market or securities
exchange on which the Common Stock is then listed.
(viii) Make available for inspection by the holder of Registrable
Securities, upon request, all SEC Documents (as defined below) filed
subsequent to the Closing and require the Company's representatives to
supply all information reasonably requested by any holder of Registrable
Securities in connection with such registration statement. Nothing herein
shall require the Company to postpone filing the registration statement
or to delay the effectiveness thereof.
(e) Each holder of Registrable Securities will furnish to the Company in
connection with any registration under this Section such information
regarding itself, the Registrable Securities and other securities of the
Company held by it, and the intended method of disposition of such
securities as shall be reasonably required to effect the registration of the
Registrable Securities held by such holder of Registrable Securities. The
Investor shall provide such data at or prior to the Closing. The intended
method of disposition (Plan of Distribution) of such securities as so
provided by Investor shall be included without alteration in the
Registration Statement covering the Registrable Securities and shall not be
changed without written consent of the Investor.
(f) (i) The Company shall indemnify, defend and hold harmless each
holder of Registrable Securities which are included in a registration
statement pursuant to the provisions of Subsections (b) or (c) (each, a
"Selling Shareholder") and each of its officers, directors, employees,
agents, partners or controlling persons (within the meaning of the Act)
(each, an "indemnified party") from and against, and shall reimburse such
indemnified party with respect to, any and all claims, suits, demands,
causes of action, losses, damages, liabilities, costs or expenses
("Liabilities") to which such indemnified party may become subject under the
Act or otherwise, arising from or relating to (A) any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or (B) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading; provided, however, that the Company shall not be liable in any
such case to the extent that any such Liability arises out of or is based
upon an untrue statement or omission so made in reliance upon information
furnished by such indemnified party in writing specifically for use in the
registration statement; provided further, that the Company shall not be
liable in any such case to the extent that any such Liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in any preliminary prospectus if (i) a Selling
Shareholder under an
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obligation to send or deliver a copy of the prospectus with or prior to the
delivery of written confirmation of the sale of Registrable Securities to
the person asserting such Liability who purchased such Registrable
Securities which are the subject thereof from such Selling Shareholder
failed to do so and (ii) the prospectus would have corrected such untrue
statement or omission; and provided further, that the Company shall not be
liable in any such case to the extent that any Liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission in the prospectus, if such untrue statement or alleged
untrue statement, omission or alleged omission is corrected in an amendment
or supplement to the prospectus and if, having previously been furnished by
or on behalf of the Company with copies of the prospectuses so amended or
supplemented and having been obligated to deliver such prospectuses, the
Selling Shareholder thereafter failed to deliver such prospectus as so
amended or supplemented, prior to or concurrently with the sale of
Registrable Securities to the person asserting such Liability who purchased
such Registrable Securities which are the subject thereof from such Selling
Shareholder.
(ii) In the event of any registration under the Act of Registrable
Securities pursuant to Subsections (b) or (c), each holder of such
Registrable Securities hereby severally agrees to indemnify, defend and
hold harmless the Company, and its officers, directors, employees,
agents, partners, or controlling persons (within the meaning of the Act)
(each, an "indemnified party") from and against, and shall reimburse such
indemnified party with respect to, any and all Liabilities to which such
indemnified party may become subject under the Act or otherwise, arising
from or relating to (A) any untrue statement or alleged untrue statement
of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or
(B) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading; provided, that such holders will be liable in any such case
to the extent, and only to the extent, that any such Liability arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement,
prospectus or amendment or supplement thereto in reliance upon written
information furnished in an instrument duly executed by such holder
specifically for use in the registration statement.
(iii) Promptly after receipt by any indemnified party of notice of
the commencement of any action, such indemnified party shall, if a claim
in respect thereof is to be made against another party (the "indemnifying
party") hereunder, notify such party in writing thereof, but the omission
so to notify shall not relieve the indemnifying party from any Liability
which it may have to the indemnified party other than under this section
and shall only relieve it from any Liability which it may have to the
indemnified party under this section if and to the extent it is actually
prejudiced by such omission. In case any such action shall be brought
against any indemnified party and such indemnified party shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in and, to the extent it shall wish, to
assume and undertake the defense thereof with counsel reasonably
satisfactory to such indemnified party, and, after notice from the
indemnifying party to the indemnified party of its election so to assume
and undertake the defense thereof, the indemnifying party shall not be
liable to the indemnified party under this section for any legal expenses
subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected, provided, however, that if the
defendants in any such action include both the indemnifying party and
such indemnified party and the indemnified party shall have reasonably
concluded, based upon an opinion of counsel, that there may be reasonable
defenses available to it which are different from or additional to those
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available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests
of the indemnifying party, the indemnified party shall have the right to
select a separate counsel and to assume such legal defenses and otherwise
to participate in the defense of such action, with (subject to the
following sentence) the reasonable expenses and fees of such separate
counsel and other reasonable expenses related to such participation to be
reimbursed by the indemnifying party as incurred. If the Company is the
indemnifying party it shall pay the reasonable expenses and fees of only
one separate counsel whose selection is approved by the largest group of
similarly situated indemnified parties as measured by the aggregate face
value of such Registrable Securities owned by such group. Any indemnified
party who chooses not to be represented by the foregoing separate counsel
shall be entitled, at its own expense, to be represented by counsel of
its own selection.
(g) (i) With respect to the inclusion of Registrable Securities in a
registration statement pursuant to Subsections (b) or (c), all fees, costs
and expenses of and incidental to such registration, inclusion and public
offering shall be borne by the Company; provided, however, that any Selling
Shareholders participating in such registration shall bear their own share
of the underwriting discounts and commissions, and transfer taxes if any,
incurred by them in connection with such registration.
(ii) The fees, costs and expenses of registration to be borne by the
Company as provided in this Subsection (g) shall include, without
limitation, all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, and
all legal fees and disbursements and other expenses of complying with
state securities or Blue Sky laws of any jurisdiction or jurisdictions in
which securities to be offered are to be registered and qualified.
Subject to appropriate agreements as to confidentiality, and upon
reasonable advance notice from the holder or its counsel, the Company
shall make available to counsel for the holders of Registrable Securities
upon reasonable request its documents and personnel for due diligence
purposes, and shall pay the reasonable fees and disbursements of one law
firm (but not more than one) acting as counsel for a majority of such
holders. Except as otherwise provided herein, fees and disbursements of
counsel and accountants for the Selling Shareholders shall be borne by
the respective Selling Shareholders. Nothing herein shall require the
Company to postpone filing the registration statement or delay its
effectiveness.
(h) The rights to cause the Company to register all or any portion of
Registrable Securities pursuant to this Section may be assigned by Investor
to a transferee or assignee of all, or a portion equal to 20% or more, in
the aggregate, of its Shares or the Registrable Securities derived from such
Shares. Any transferee asserting registration rights hereunder shall agree
to be bound by the applicable provisions of this Agreement.
(i) From and after the date of this Agreement, the Company shall not
grant additional "piggy-back" registration rights to the holders of any
securities of the Company to include any of their securities in any
registration statement filed by the Company pursuant to Subsection (b)
unless such inclusion will not reduce the amount of the Registrable
Securities included therein.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION II.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to the Investor:
(a) Organization and Qualification. The Company is a corporation duly
incorporated and existing in good standing under the laws of Massachusetts
and has the requisite corporate power to own its properties and to carry on
its business as now being conducted. The Company does not have any material
subsidiaries except as listed in Exhibit A hereto or in the SEC Documents
(as hereinafter defined). The Company and each such subsidiary, if any, is
duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted
or property owned by it makes such qualification necessary other than those
in which the failure so to qualify would not have a Material Adverse Effect.
"Material Adverse Effect" means any material adverse effect on the business,
operations, properties, prospects, or financial condition of the Company and
its subsidiaries taken as a whole.
(b) Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and
to issue the Shares in accordance with the terms hereof, (ii) the execution
and delivery of this Agreement by the Company and the consummation by it of
the transactions contemplated hereby have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Company or its Board of Directors or stockholders is required except as
contemplated by this Agreement or Schedule I hereto (including stockholder
approval), (iii) this Agreement has been duly executed and delivered by the
Company, and (iv) this Agreement constitutes a valid and binding obligation
of the Company enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application. The
Company's chief executive officer and chief financial officer and directors
have studied and fully understand the nature of the securities being sold
hereunder, and recognize that they have a potential dilutive effect.
(c) Capitalization. The authorized capital stock of the Company consists
of 50,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock; there are 17,840,259 shares of Common Stock and 1,010,002 shares of
Class C preferred stock issued and outstanding; and, upon issuance of the
Shares in accordance with the terms hereof and pursuant to similar
agreements of like tenor, there will be 17,840,259 shares of Common Stock,
approximately 1,010,002 shares of Class C preferred stock, and 7,625 shares
of 6% Convertible Preferred Stock issued and outstanding. All of the
outstanding shares of the Company's Common Stock have been validly issued
and are fully paid and nonassessable. Except as set forth in Exhibit A
hereto and as described in the SEC Documents, no shares of Common Stock are
entitled to preemptive rights or registration rights and there are no
outstanding options, convertible securities, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, any shares of capital stock of the
Company, or contracts, commitments, understandings, or arrangements by which
the Company is or may become bound to issue additional shares of capital
stock of the Company or options, warrants, scrip, rights to subscribe to, or
commitments to purchase or acquire, any shares, or securities or rights
convertible into shares, of capital stock of the Company. The Company has
furnished or made available to the Investor true and correct copies of the
Company's charter documents as in effect on the date hereof (the "Charter"),
and the Company's By-Laws, as in effect on the date hereof (the "By-Laws").
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(d) Issuance of Shares. The issuance of the Shares has been duly
authorized and, when paid for or issued in accordance with the terms hereof,
the Shares shall be validly issued, fully paid and non-assessable and
entitled to the rights and preferences set forth in Schedule I hereto. The
Common Stock issuable upon conversion of the Shares will be duly authorized
and reserved for issuance and, upon conversion in accordance with the
Certificate of Designation to be filed by the Company to establish the
rights and preferences of the Shares, will be validly issued, fully paid and
non-assessable and not subject to any preemptive rights or adverse claims,
and the holders shall be entitled to all rights and preferences accorded to
a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby do not and will not (i) result in a
violation of the Company's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or
result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including Federal and state
securities laws and regulations) applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected (except as contemplated by Section 10 of
Schedule I hereto and except for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect); provided
that, for purposes of such representation as to Federal, state, local or
foreign law, rule or regulation, no representation is made herein with
respect to any of the same applicable solely to the Investor and not to the
Company. The business of the Company is not being conducted in violation of
any law, ordinance or regulations of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have
a Material Adverse Effect. The Company is not required under Federal, state
or local law, rule or regulation in the United States to obtain any consent,
authorization or order of, or make any filing (other than the filing of a
Certificate setting forth the terms of the Shares with the Massachusetts
Secretary of State) or registration with, any court or governmental agency
in order for it to execute, deliver or perform any of its obligations under
this Agreement or issue and sell the Shares in accordance with the terms
hereof (other than any SEC, NASD or state securities filings which may be
required to be made by the Company and any registration statement which may
be filed pursuant hereto); provided that, for purposes of the representation
made in this sentence, the Company is assuming and relying upon the accuracy
of the relevant representations and agreements of the Investor herein.
Purchase of the Shares by the Investor and conversion of the Shares pursuant
to the provisions hereof and of Schedule I hereto, if and so long as Section
3.5 hereof is complied with, will not cause any person to become an
"acquiring person" or otherwise create any remedy against the Investor under
the Shareholder Rights Plan of the Company.
(f) SEC Documents, Financial Statements. The Common Stock of the Company
is registered pursuant to Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the SEC pursuant to the reporting requirements of the Exchange Act,
including material filed pursuant to Section 13(a) or 15(d), in addition to
one or more registration statements and amendments thereto heretofore filed
by the Company with the SEC (all of the foregoing including filings
incorporated by reference therein being referred to herein as the "SEC
Documents"). The Company has delivered or made available to the Investor
true and complete copies of the quarterly and annual (including, without
limitation, proxy information and solicitation materials) SEC Documents
filed with the SEC since December 31, 1995. The Company has not provided to
the
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Investor any information which, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company but which has
not been so disclosed, other than with respect to the transactions
contemplated by this Agreement. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated thereunder
except as set forth on Exhibit A and other federal, state and local laws,
rules and regulations applicable to such SEC Documents, and none of the SEC
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of the Company included
in the SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC or other applicable rules and regulations with respect thereto.
Such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed
or summary statements) and fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments).
(g) No Material Adverse Change. Since the date through which the most
recent quarterly report of the Company on Form 10-Q has been prepared and
filed with the SEC, a copy of which is included in the SEC Documents, no
event which would have a Material Adverse Effect has occurred or exists with
respect to the Company or its subsidiaries otherwise than in the ordinary
course of business, except as otherwise disclosed or reflected in other SEC
Documents prepared through or as of a date subsequent thereto, and the
Company has not received any communication from the SEC or the NASD
regarding any possible de-listing of the Company's Common Stock except as
disclosed in the Company's report on Form 10-Q for June 30, 1997 and
subsequent related communications from the NASD.
(h) No Undisclosed Events or Circumstances. No event or circumstance has
occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(i) No General Solicitation. Neither the Company, nor any of its
affiliates, or, to its knowledge, any person acting on its or their behalf
(including ▇▇▇▇▇▇▇▇ Capital Corp. (the "Placement Agent")), has engaged in
any form of general solicitation or general advertising (within the meaning
of Regulation D under the Act) in connection with the offer or sale of the
Shares.
(j) No Integrated Offering. Earlier offers or discussions regarding
possible sales of securities by the Company have not been such as to require
registration of the Shares under the Act.
(k) Approval Commitments. The Company has received binding assurance
from its chief executive officer, chief financial officer and its directors
and the only stockholder known to the Company that owns more than 5% of the
outstanding stock of the Company, to the effect that such persons will vote
all their shares in favor of such approval of the transactions contemplated
hereby as may be necessary to comply with any rule or regulation of the NASD
or any other regulatory agency.
9
(l) Lender Approvals. The Company has received all consents or approvals
from holders of its debt securities that are necessary to allow the Company
to redeem a portion of the Shares if so required pursuant to Schedule I
hereto.
SECTION II.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
hereby makes the following representations and warranties to the Company:
(a) Authorization, Enforcement. (i) Such Investor has the requisite
power and authority to enter into and perform this Agreement and to purchase
the Shares being sold hereunder, (ii) the execution and delivery of this
Agreement by the Investor and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate or
partnership action, and (iii) this Agreement constitutes a valid and binding
obligation of the Investor enforceable against the Investor in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
(b) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by the Investor of the transactions
contemplated hereby do not and will not (i) result in a violation of the
Investor's charter documents or By-Laws or (ii) conflict with any agreement,
indenture or instrument to which Investor is a party, or (iii) result in a
violation of any law, rule, or regulation, or any order, judgment or decree
of any court or governmental agency applicable to Investor. The business of
the Investor is not being conducted in violation of any law or regulation of
any governmental entity, except for possible violations which either singly
or in the aggregate do not and will not have a material adverse effect on
the Investor. The Investor is not required to obtain any consent or
authorization of any governmental agency in order for it to perform its
obligations under this Agreement. The data to be provided by the Investor in
connection with registering the Registrable Securities under the Act will be
true and correct in all material respects.
(c) Investment Representation. The Investor is purchasing the Shares for
its own account for investment and not with a view to distribution otherwise
than in compliance with the Act. Investor has no present intention to sell
the Shares and Investor has no present arrangement (whether or not legally
binding) to sell the Shares to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not
agree to hold the Shares for any minimum or other specific term and reserves
the right to dispose of the Shares at any time in accordance with Federal
and state securities laws applicable to such disposition.
(d) Accredited Investor. The Investor is an accredited investor as
defined in Rule 501 promulgated under the Act. The Investor has such
knowledge and experience in financial and business matters in general, and
investments in particular, so that the Investor is able to evaluate the
merits and risks of an investment in the Shares and to protect its own
interests in connection with such investment. In addition (but without
limiting the effect of the Company's representations and warranties
contained herein), the Investor has received such information as it
considers necessary or appropriate for deciding whether to purchase the
Shares pursuant hereto. The Investor acknowledges that no representation or
warranty is made by the Placement Agent or any persons representing the
Placement Agent with respect to the Company or sale of the Shares.
(e) Rule 144. The Investor understands that there is no public trading
market for the Shares, that none is expected to develop, and that the Shares
must be held indefinitely unless such Shares or securities into which the
Shares are converted are registered under the Act or an exemption from
registration is available. The Investor has been advised or is aware of the
provisions of Rule 144 promulgated under the Act.
10
ARTICLE III
COVENANTS
SECTION III.1 SECURITIES COMPLIANCE.
(a) The Company shall notify the SEC and NASD, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Shares and Common Stock issuable upon conversion thereof to
the Investor or subsequent holder.
(b) The Investor understands that the Shares are being offered and sold
in reliance on a transactional exemption from the registration requirements
of Federal and state securities laws and that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Investor set forth herein in order
to determine the applicability of such exemptions and the suitability of the
Investor to acquire the Shares.
SECTION III.2 REGISTRATION AND LISTING. Until one (1) year after all Shares
have been converted into Common Stock, the Company will cause its Common Stock
(or other securities into which the Shares are convertible) to continue to be
registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all
respects with its reporting and filing obligations under said act, will comply
with all requirements related to any registration statement filed pursuant to
this Agreement and will not take any action or file any document (whether or not
permitted by the Act or the Exchange Act or the rules thereunder) to terminate
or suspend such registration or to terminate or suspend its reporting and filing
obligations under said Acts, except as permitted herein. Until one (1) year
after all Shares have been converted into Common Stock the Company will use its
best efforts to continue the listing or trading of its Common Stock (or other
securities into which the Shares are convertible) on the Nasdaq National Market
or the Nasdaq Small Cap Market or a national securities exchange and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and Nasdaq.
SECTION III.3 STOCKHOLDER APPROVAL. The Company will use its best efforts
to promptly notice and hold a stockholders meeting as soon as reasonably
practicable to obtain any stockholder approvals required by the Company
(including those required by all applicable agreements between the Company and
the NASD or Nasdaq) to allow for issuance of Common Stock upon conversion of the
Shares.
SECTION III.4 SALE RESTRICTIONS. Following conversion of the Shares into
Common Stock of the Company, Investor will not on any trading day offer or sell
publicly on NASDAQ or on the principal exchange on which the Common Stock is
traded, or any other securities market or securities exchange, on a net basis,
more than the following number of such shares of Common Stock: the greatest of
(i) 10% of the average daily trading volume of the Common Stock for the five
trading days immediately preceding such sale as reported by NASDAQ or by such
principal exchange, (ii) 12,000 shares, or (iii) 10% of the trading volume for
the Common Stock on such day, as reported by NASDAQ or by such principal
exchange. This provision shall survive the final conversion date of the Shares.
SECTION III.5 CONVERSION RIGHTS. Investor shall not be entitled to convert
any Share into Common Stock of the Company if following conversion of such Share
the Investor and its affiliates (within the meaning of the Exchange Act) shall
be the beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of
10% or more of the Common Stock of the Company, or if a lesser percentage is set
forth after the name of the Investor on the signature page hereof, such lesser
percentage. The provisions of this Section cannot be amended.
11
SECTION III.6 HEDGING RESTRICTIONS. Investor agrees not to engage in any
short sales, swaps, purchasing of puts, or other hedging activities that involve
the direct or indirect use of the Common Stock or any derivative securities
based on Common Stock to hedge its investment in the Shares. This Section shall
not apply to transactions in which Investor has no beneficial interest made on
behalf of third-party clients who are not holders of Shares.
SECTION III.7 NOTICE OF CONVERSION CAP. No later than 10 days after the end
of the 15th full calendar month after the Closing Date the Company will deliver
notice to the Investor specifying the amount of the then applicable Conversion
Cap (as defined in Schedule I hereto) and the calculation thereof.
ARTICLE IV
CONDITIONS
SECTION IV.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL
THE SHARES. The obligation hereunder of the Company to issue and/or sell the
Shares to the Investor is subject to the satisfaction, at or before the Closing,
of each of the conditions set forth below. These conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) Accuracy of the Investor's Representations and Warranties. The
representations and warranties of the Investor shall be true and correct in
all material respects when made and as of the Closing Date.
(b) Performance by the Investor. The Investor shall have performed all
agreements and satisfied all conditions required to be performed or
satisfied by the Investor at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
SECTION IV.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTOR TO
PURCHASE THE SHARES. The obligation hereunder of the Investor to acquire and
pay for the Shares is subject to the satisfaction, at or before the Closing, of
each of the conditions set forth below. These conditions are for the Investor's
sole benefit and may be waived by the Investor at any time in its sole
discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that
speak as of a particular date).
(b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or
satisfied by the Company at or prior to the Closing.
(c) Nasdaq. The Company's Common Stock shall be listed and trade on the
Nasdaq National Market on the Closing Date.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
12
(e) Opinion of Counsel, Etc. At the Closing the Investor shall have
received an opinion of counsel to the Company (who may be in-house counsel)
in the form attached hereto, and such other certificates and documents as
the Investor or its counsel shall reasonably require incident to the
Closing.
ARTICLE V
LEGEND ON STOCK
Each certificate representing the Shares and, if appropriate, securities
issued upon conversion thereof, shall be stamped or otherwise imprinted with a
legend substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
The Company agrees to reissue certificates representing the Shares or, if
applicable, the securities issued upon conversion thereof without the legend set
forth above at such time as (i) in the opinion of counsel to the holder, the
holder thereof is permitted to dispose of such Shares (or securities issued upon
conversion thereof) pursuant to Rule 144 under the Act, (ii) the securities are
sold to a purchaser or purchasers who (in the opinion of counsel to such
purchasers, in form and substance reasonably satisfactory to the Company and its
counsel) are able to dispose of such shares publicly without registration under
the Act, or (iii) such securities are included in an effective registration
statement under the Act.
ARTICLE VI
TERMINATION
SECTION VI.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing by the mutual written consent of the
Company and the Investor.
SECTION VI.2 OTHER TERMINATION. This Agreement may be terminated by action
of the Board of Directors or other governing body of the Investor or the Company
at any time if the Closing shall not have been consummated by the fifth business
day following the date of this Agreement and in no event later than September
30, 1997.
SECTION VI.3 AUTOMATIC TERMINATION. This Agreement shall automatically
terminate without any further action of either party hereto if the Closing shall
not have occurred by the tenth business day following the date of this
Agreement.
ARTICLE VII
MISCELLANEOUS
SECTION VII.1 FEES AND EXPENSES. Except as otherwise set forth in Section
1.4 hereof, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company will compensate the Placement Agent
and will indemnify it against certain liabilities. The Placement Agent's
compensation includes a cash payment in an amount equal to 8.7% of the Purchase
Price of Shares sold by the Company, and the issuance of warrants to the
Placement Agent to purchase that number of Shares equal to 10% of the number of
Shares sold. The Company shall
13
pay all stamp and other taxes and duties levied in connection with the issuance
of the Shares pursuant hereto.
SECTION VII.2 SPECIFIC ENFORCEMENT, CONSENT TO JURISDICTION.
(a) The Company and the Investor acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which either of them may be
entitled by law or equity.
(b) Each of the Company and the Investor (i) hereby irrevocably submits
to the jurisdiction of the United States District Court and other courts of
the United States sitting in New York for the purposes of any suit, action
or proceeding arising out of or relating to this Agreement and (ii) hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or
that the venue of the suit, action or proceeding is improper. Each of the
Company and the Investor consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address
in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing in this paragraph shall affect or limit any right to serve
process in any other manner permitted by law.
SECTION VII.3 ENTIRE AGREEMENT: AMENDMENT. This Agreement contains the
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein, neither the Company nor the
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
SECTION VII.4 NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier
14
service, fully prepaid, addressed to such address, or upon actual receipt of
such mailing, whichever shall first occur. The addresses for such communications
shall be:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, President
Interleaf, Inc.
▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
to the Company: Fax: (▇▇▇) ▇▇▇-▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇, Esq.
Peabody & ▇▇▇▇▇▇
▇▇ ▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ 02110-21253342
with a copy to: Fax: (▇▇▇) ▇▇▇-▇▇▇▇
At the address set forth at the foot of this
Agreement, with copies to Investor's counsel as
to the set forth at the foot of this Agreement or as
Investor: specified in writing by Investor
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ Capital Corp.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to: Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other party
hereto.
SECTION VII.5 WAIVERS. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
SECTION VII.6 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
SECTION VII.7 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns. The parties hereto may amend this Agreement
without notice to or the consent of any third party.
SECTION VII.8 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
SECTION VII.9 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of New York without
regard to such state's principles of conflict of laws.
15
SECTION VII.10 SURVIVAL. The representations and warranties of the Company
and the Investor contained in Article II and the agreements and covenants set
forth in Articles I, III, V and VII shall survive the Closing for five years.
SECTION VII.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event any signature is delivered by facsimile
transmission, the party using such means of delivery shall cause the manually
executed signature page(s) to be physically delivered to the other party within
five days of the execution hereof.
SECTION VII.12 PUBLICITY. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Investor without
its consent, unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the date hereof.
INTERLEAF, INC.
By:
-----------------------------------------
Name:
Its: PRESIDENT
Number of Shares
THE INVESTOR
By:
-------------- -----------------------------------------
Dollar Amount at Name:
$1,000 per share Its:
$ -------------- Investor's address:
Percentage limitation, if desired
Name and address of Investor's counsel:
16
SCHEDULE I
RESOLUTION ESTABLISHING PREFERENCES
OF
6% CONVERTIBLE PREFERRED STOCK
RESOLVED that there shall be a series of shares of the Preferred Stock of
the Corporation designated "6% Convertible Preferred Stock"; that the number of
authorized shares of such series shall be 11,000 and that the rights and
preferences of such series (the "6% Preferred") and the limitations or
restrictions thereon, shall be as follows:
1. DIVIDENDS.
(a) The holders of the 6% Preferred shall be entitled to receive out of
any assets legally available therefor cumulative dividends at the rate of
$60.00 per share per annum, payable annually on September 30 of each year,
when and as declared by the Board of Directors, in preference and priority
to any payment of any dividend on the Common Stock or any other class or
series of stock of the Corporation ranking junior to the 6% Preferred and
ranking PARI PASSU with the Class C Preferred Stock of the Corporation. Such
dividends shall accrue on any given share from the day of original issuance
of such share and shall accrue from day to day whether or not earned or
declared. If at any time dividends on the outstanding 6% Preferred at the
rate set forth above shall not have been paid or declared and set apart for
payment with respect to all preceding periods, the amount of the deficiency
shall be fully paid or declared and set apart for payment, but without
interest, before any distribution, whether by way of dividend or otherwise,
shall be declared or paid upon or set apart for the shares of any other
class or series of stock of the Corporation except a class or series which
is entitled to priority over the 6% Preferred.
(b) Dividends shall be paid in shares of 6% Preferred valued at $1,000
per share. Dividends not theretofore paid shall be paid upon conversion of
any share of the 6% Preferred and shall be simultaneously converted into
Common Stock together with the share on which such dividends have accrued.
(c) At its option, the Corporation may elect to pay accumulated
dividends in cash. The Corporation must give notice of such election in the
manner provided in Section 5 hereof at least ten (10) calendar days prior to
both the date of payment and the date Notice of Conversion is given by a
holder. The Corporation may choose the cash election any number of times and
each such election may be effective for any length of time established by
the Corporation and stated in its notice of the election.
2. LIQUIDATION PREFERENCE.
(a) The liquidation rights of the 6% Preferred shall rank pari passu
with the Class C Preferred Stock of the Corporation. In the event of any
liquidation, dissolution or winding up of the Corporation, either voluntary
or involuntary, the holders of the 6% Preferred shall be entitled to
receive, prior and in preference to any distribution of any assets of the
Corporation to the holders of the Common Stock or any other class or series
of shares except any class or series which is entitled to priority over the
6% Preferred and except for ratable distribution to the Class C Preferred
Stock, the amount of $1,000 per share plus any accrued but unpaid dividends
plus any amounts accrued but unpaid under Section 1.4(b)(iv) of the
Preferred Stock Investment Agreement under which shares of the 6% Preferred
were originally issued (the "Liquidation Preference").
1
(b) Subject to the last sentence of this Section, a consolidation or
merger of the Corporation with or into any other corporation or
corporations, or a sale of all or substantially all of the assets of the
Corporation, shall, at the option of the holders of the 6% Preferred, be
deemed a liquidation, dissolution or winding up within the meaning of this
Section 2 if the shares of stock of the Corporation (along with all
derivative securities) outstanding immediately prior to such transaction
represent immediately after such transaction less than a majority of the
voting power of the surviving corporation (or of the acquirer of the
Corporation's assets in the case of a sale of assets). Such option may be
exercised by the vote or written consent of holders of a majority of the 6%
Preferred at any time within thirty calendar days after written notice of
the essential terms of such transaction shall have been given to the holders
of the 6% Preferred as provided in Section 5 hereof. Such notice shall be
given by the Corporation immediately following determination of such
essential terms. If such option is exercised, the holders of the 6%
Preferred shall be entitled to receive, in cash, immediately upon the
occurrence of such transaction, an amount per share equal to the Liquidation
Preference divided by the difference between 100% and the Applicable
Percentage determined pursuant to Section 4 hereof. This Section shall not
apply to a business combination in which the Common Stock of the Corporation
is converted solely into or exchanged solely for voting common stock of the
corporation surviving such business combination, if (i) such common stock of
the surviving corporation is listed and traded on the NASDAQ National
Market, the American Stock Exchange or the New York Stock Exchange, and (ii)
the Board of Directors of the Corporation determines in good faith that the
conversion rights and other rights and preferences of the 6% Preferred are
preserved and not rendered of less value by the terms of such business
combination.
3. MANDATORY CONVERSION.
On the fifth anniversary of the date of issuance, all then outstanding
shares of 6% Preferred shall be automatically converted into Common Stock at the
Conversion Price on such anniversary date and otherwise pursuant to the
applicable provisions set forth in Section 4 hereof.
4. CONVERSION. The holders of the 6% Preferred shall have optional
conversion rights as follows:
(a) Accrual of Conversion Rights. The Conversion Period shall commence
90 days after the date of issuance, and shall continue thereafter for the
life of the issue. Each holder of record of 6% Preferred shares on the date
of commencement of the Conversion Period (an "Original Holder") shall be
entitled to convert in any calendar month the following percentage of the 6%
Preferred shares held by such holder on the date of commencement of the
Conversion Period (the "Conversion Restriction"). The percentage for each
calendar month will be determined based on the highest of the daily low
trading prices of the Common Stock during such month, as follows:
HIGHEST OF DAILY LOW
TRADING PERCENTAGE BECOMING
PRICES DURING MONTH CONVERTIBLE FOR SUCH MONTH
------------------------- ---------------------------
$2.50 or less 10.0%
$2.51 to $3.50 10.0%
$3.51 to $4.00 12.5%
$4.01 to $5.50 15.0%
$5.51 to $6.00 17.5%
$6.01 to $7.50 20.0%
$7.51 to $8.50 22.5%
$8.51 or more 25.0%
2
The number of shares which may be converted in any calendar month shall include
on a cumulative basis the number of shares which might have been but were not
converted during earlier calendar months, except that in any month in which the
highest of the daily low trading prices is $2.50 or less, the amount converted
shall not exceed 10%. In the case of transfers of shares by an Original Holder
the Corporation shall make such notations on its stock ownership records and on
the certificates for shares issued upon transfer so as to reflect the portion
(if any) of the transferred shares which have become convertible pursuant to
this provision, or the Corporation may at its election issue certificates
representing the 6% Preferred shares in such form, or with such annotations, as
to reflect the time or times at which the shares represented by such
certificates will become convertible.
(b) Removal of Limitations. The limitations set forth in Section 4(a)
hereof, with respect to the percentage of 6% Preferred shares which may be
converted during certain time periods, shall terminate and all the 6%
Preferred shares shall thereafter be fully convertible if any of the
following events or conditions shall occur or exist: (i) an event described
in Section 2(b) (subject to the exclusion in the last sentence of such
Section) shall occur, whether or not the holders of 6% Preferred deem such
event to be a liquidation; (ii) proceedings for relief under any bankruptcy
or similar law for the relief of debtors are instituted by or against the
Corporation or any of its significant subsidiaries and, if instituted
against the Corporation or such subsidiary, are consented to or not
dismissed within 30 days; (iii) the independent auditors of the Corporation
shall fail or be unwilling to express within 90 days after the end of the
Corporation's fiscal year a customary opinion on the financial statements of
the Corporation, or shall express such opinion subject to a "going concern"
qualification; (iv) the Common Stock of the Corporation shall cease to be
listed on either the NASDAQ Small-Cap Market, the NASDAQ National Market, or
a national securities exchange; or (v) there shall be a material breach by
the Corporation of any of its obligations hereunder or under the Preferred
Stock Investment Agreements pursuant to which the 6% Preferred was
originally issued which has a material adverse effect on the holders of 6%
Preferred.
(c) Right to Convert. At and after the time it has become convertible,
each share of 6% Preferred shall be convertible, at the option of the holder
thereof, into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing (i) the liquidation preference of the 6%
Preferred share determined pursuant to Section 2(a) hereof on the date the
notice of conversion is given, by (ii) the Conversion Price determined as
hereinafter provided in effect on said date, provided however, that a share
of 6% Preferred shall not be converted into Common Stock if following such
conversion the holder thereof together with affiliates of such holder would
be the beneficial owners (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of 10% or more of the Common Stock of the Corporation.
(d) Mechanics of Conversion. To convert shares of 6% Preferred into
shares of Common Stock, the holder shall give written notice to the
Corporation (which notice may be given by facsimile transmission) that such
holder elects to convert the same and shall state therein the number of
shares to be converted and the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued.
Promptly thereafter the holder shall surrender the certificate or
certificates representing the shares to be converted, duly endorsed, at the
office of the Corporation or of any transfer agent for such shares, or at
such other place designated by the Corporation. The Corporation shall,
immediately upon receipt of such notice, issue and deliver to or upon the
order of such holder, against delivery of the certificates representing the
shares which have been converted, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled, and
a certificate representing the shares of 6% Preferred not so converted, if
any. The Corporation shall effect such issuance immediately and shall
transmit the certificates by messenger or
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overnight delivery service to reach the address designated by such holder
within three trading days after the receipt of such notice. Notice of
conversion may be given by a holder at any time of day up to 5:00 pm Los
Angeles time, and such conversion shall be deemed to have been made
immediately prior to the close of business on the date such notice of
conversion is given (the "Conversion Date"). The person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock at the close of business on the Conversion Date.
(e) Determination of Conversion Price.
(i) On any Conversion Date prior to the first day of the thirteenth
calendar month after the Closing, the Conversion Price shall not be less
than $1.50, and until the end of the seventh month following the Closing
the Conversion Price shall be $5.50. Subject to the foregoing sentence
and to the provisions of subsection (e)(iii) and subsection (f) of this
Section, on any Conversion Date, the Conversion Price shall be the
average of the three (3) lowest daily trading prices of the Common Stock
for the 22 consecutive trading days ending with the trading day prior to
the Conversion Date, reduced by the Applicable Percentage (as defined
below) in effect on the Conversion Date.
(ii) The Applicable Percentage shall be as follows:
9.8% starting on the first day of the eighth (8th) calendar month after
Closing.
11.1% starting on the first day of the ninth (9th) calendar month after
Closing.
12.4% starting on the first day of the tenth (10th) calendar month after
Closing.
13.7% starting on the first day of the eleventh (11th) calendar month
after Closing.
15.0% starting on the first day of the twelfth (12th) calendar month
after Closing and thereafter.
(iii) From and after the first day of the sixteenth (16th) calendar
month after Closing, the Maximum Conversion Price ("Conversion Cap")
shall be 85% of the average low daily trading price of the Common Stock
during the period beginning on the first day of the twelfth (12th)
calendar month following Closing and ending on the last day of the
fifteenth (15th) calendar month following Closing. Notwithstanding the
prior sentence, in no event shall the Conversion Cap be less than the
greater of: i) two dollars and fifty cents ($2.50), or ii) the average
daily closing price of the Common Stock for the five (5) trading days
immediately prior to the Closing.
(iv) The terms "low trading price" and "last sale price" of the
Common Stock on any day shall mean, respectively, (A) the lowest reported
sale price and the last reported sale price of the Common Stock on the
principal stock exchange on which the Common Stock is listed, or (B) if
the Common Stock is not listed on a stock exchange, the lowest reported
sale price and the last reported sale price of the Common Stock on the
principal automated securities price quotation system on which sale
prices of the Common Stock are reported, or (C) if the Common Stock is
not listed on a stock exchange and sale prices of the Common Stock are
not reported on an automated quotation system, the lowest bid price and
the last bid price for the Common Stock as reported by National Quotation
Bureau Incorporated. If none of the foregoing provisions are applicable,
the "low trading price" and "last sale price" of the Common Stock on a
day will be the fair market value of the Common Stock on that day as
determined by a member firm of the New York Stock Exchange, Inc.,
selected by the Board of Directors of the Corporation. The term "trading
day" means (x) if the Common Stock is listed on at least one stock
exchange, a day on
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which there is trading on the principal stock exchange on which the
Common Stock is listed, (y) if the Common Stock is not listed on a stock
exchange but sale prices of the Common Stock are reported on an automated
quotation system, a day on which trading is reported on the principal
automated quotation system on which sales of the Common Stock are
reported, or (z) if the foregoing provisions are inapplicable, a day on
which quotations are reported by National Quotation Bureau Incorporated.
The "closing price" of the Common Stock on any day means the "last sale
price" as defined above.
(v) In the event that during any period of consecutive trading days
provided for above, the Corporation shall declare or pay any dividend on
the Common Stock payable in Common Stock or in rights to acquire Common
Stock, or shall effect a stock split or reverse stock split, or a
combination, consolidation or reclassification of the Common Stock, then
the Conversion Price and (if such event occurs during or after the 12th
month after the date of issuance) the Conversion Cap shall be
proportionately decreased or increased, as appropriate, to give effect to
such event, and like adjustment shall be made in any price per share
specified in dollars herein.
(f) Green Floor. If at any time the Conversion Price falls below three
dollars ($3.00) per share (the "Green Floor Price"), the Corporation may at
its option, exercised by written notice ("Cash Conversion Notice") given to
the holders of the 6% Preferred five days prior to the effective date
specified in such Notice (the "Effective Date") honor any conversion request
otherwise properly made, if at a Conversion Price lower than the Green Floor
Price, by a cash payment in lieu of the issuance of Common Stock in an
amount equal to the proceeds which would otherwise have been received by the
holder if conversion were in fact made into Common Stock and such Common
Stock were sold at the high trade price on the trading day immediately
preceding the date that the conversion notice is received (the "Cash
Conversion Amount"). The Cash Conversion Notice may specify an expiration
date of such Notice, or may specify a limitation on the aggregate number of
dollars which the Corporation will pay in Cash Conversion Amounts. When such
dollar limitation is reached the Corporation shall give immediate notice to
the holders of 6% Preferred that the Cash Conversion Notice is no longer in
effect. The Corporation may at any time reset the Green Floor Price to any
price determined by the Corporation by giving 30 days prior notice to the
holders of the 6% Preferred. If notice of conversion shall be given by a
holder of 6% Preferred shares on a date that a Cash Conversion Notice is in
effect, the Corporation shall within 48 hours following surrender of the
share certificate as provided in Section 4(d) hereof make payment of the
Cash Conversion Amount to such holder by wire transfer of immediately
available funds in U.S. dollars pursuant to such wire transfer instructions
as may have been given by such holder, or otherwise by mailing by certified
mail a bank cashiers' or certified check for the Cash Conversion Amount to
the record address of such holder. A Cash Conversion Notice shall cease to
be effective if the Corporation fails to make payment of the Cash Conversion
Amount to any holder entitled thereto in the manner and within the time
specified in the foregoing sentence, time being of the essence. If a Cash
Conversion Notice ceases to be effective pursuant to the foregoing sentence,
it shall not thereafter be effective as to any holder and no Cash Conversion
Notice may thereafter be given by the Corporation. The number of shares that
a holder is entitled to convert, determined pursuant to subsections (a) and
(b) of this Section 4, shall not be affected by the giving or effectiveness
of a Cash Conversion Notice. Any Cash Conversion Notice shall be given as
provided in Section 5 hereof.
(g) Distributions. In the event the Corporation shall at any time or
from time to time make or issue, or fix a record date for the determination
of holders of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation or any of its
subsidiaries or other property, other than cash dividends from earnings or
dividends of additional shares of Common
5
Stock, then in each such event provision shall be made so that the holders
of 6% Preferred shall receive, upon the conversion thereof, the securities
or other property which they would have received had they been the owners on
the date of such event of the number of shares of Common Stock issuable to
them upon conversion.
(h) Certificates as to Adjustments. Upon the occurrence of any
adjustment or readjustment of the Conversion Price or the Conversion Cap
pursuant to Section 4(e)(v) or Section 4(m) hereof, or any adjustment of the
cash per-share prices specified herein, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of 6% Preferred a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of 6%
Preferred, furnish or cause to be furnished to such holder a like
certificate prepared by the Corporation setting forth (i) such
adjustments and readjustments, and (ii) the number of other securities and
the amount, if any, of other property which at the time would be received
upon the conversion of 6% Preferred with respect to each share of Common
Stock received upon such conversion. If any holder disputes the computation
of such adjustment the Corporation shall cause independent public
accountants selected by the Corporation to verify and, if necessary, correct
such computation.
(i) Notice of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any security or right
convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall give notice
to each holder of 6% Preferred at least 10 days prior to such date
specifying the date on which any such record is to be taken for the purpose
of such dividend, distribution, security or right and the amount and
character of such dividend, distribution, security or right.
(j) Issue Taxes. The Corporation shall pay any and all issue and other
taxes, excluding any income, franchise or similar taxes, that may be payable
in respect of any issue or delivery of shares of Common Stock on conversion
of shares of 6% Preferred pursuant hereto; provided, however, that the
Corporation shall not be obligated to pay any transfer taxes resulting from
any transfer requested by any holder in connection with any such conversion.
(k) Reservation of Stock Issuable Upon Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
of the shares of the 6% Preferred, such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the 6% Preferred, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the 6% Preferred,
the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain
the requisite shareholder approval as promptly as practicable.
(l) Fractional Shares. No fractional shares shall be issued upon the
conversion of any share or shares of 6% Preferred. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than
one share of 6% Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance
of any fractional share.
6
If, after the aforementioned aggregation, the conversion would result in the
issuance of a fraction of a share of Common Stock, the Corporation shall, in
lieu of issuing any fractional share, pay the holder otherwise entitled to
such fraction a sum in cash equal to the fair market value of such fraction
on the date of conversion (as determined in good faith by the Board of
Directors of the Corporation).
(m) Reorganization or Merger. In case of any reorganization or any
reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other
corporation or corporations or a sale of all or substantially all of the
assets of the Corporation to any other person, and the holders of 6%
Preferred do not elect to treat such transaction as a liquidation,
dissolution or winding up as provided in Section 2, then, as part of such
reorganization, consolidation, merger or sale, provision shall be made so
that each share of 6% Preferred shall thereafter be convertible into the
number of shares of stock or other securities or property (including cash)
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such share of 6% Preferred would have been entitled upon the
record date of (or date of, if no record date is fixed) such event and, in
any case, appropriate adjustment (as determined by the Board of Directors)
shall be made in the application of the provisions herein set forth with
respect to the rights and interests thereafter of the holders of the 6%
Preferred, to the end that the provisions set forth herein shall thereafter
be applicable, as nearly as equivalent as is practicable, in relation to any
shares of stock or the securities or property (including cash) thereafter
deliverable upon the conversion of the shares of 6% Preferred. The
Corporation shall have no obligation to obtain the prior consent of the
holders of 6% Preferred, individually or as a class, except as expressly
provided herein or as provided by applicable law.
5. NOTICES. Any notice to be given to the holders of the 6% Preferred shall
be (i) mailed by first class mail postage prepaid to each holder of 6% Preferred
at the address shown on the records of the Corporation for such holder, (ii)
transmitted by telecopy or facsimile transmission to any holder which has
supplied a telecopy or facsimile address to the Corporation, and (iii) unless
receipted for by telecopy or facsimile on the date such notice is given, shall
be transmitted by an overnight delivery service or courier service for delivery
at the address shown on the records of the Corporation for such holder on the
first business day following the date such notice is given, or if delivery in
one business day to such address cannot be effected by such delivery service,
then on the earliest day on which such delivery can be made.
6. OTHER PROVISIONS. For all purposes of this Resolution, the term "date of
issuance" or "closing" shall mean the day on which shares of the 6% Preferred
are first issued by the Corporation, and the terms "trading price", "low trading
price", "closing price", "last trade price", and "trading days" shall have the
meanings given them in Section 4(e) hereof. Any provision herein which conflicts
with or violates any applicable usury law shall be deemed modified to the extent
necessary to avoid such conflict or violation.
7. RESTRICTIONS AND LIMITATIONS. The Corporation shall not undertake the
following actions without the consent of the holders of a majority of the 6%
Preferred: (i) modify its Certificate of Incorporation or Bylaws so as to amend
or change any of the rights, preferences, or privileges of the 6% Preferred,
(ii) authorize or issue any other equity security senior to the 6% Preferred, or
(iii) purchase or otherwise acquire for value any Common Stock or other equity
security of the Corporation either junior or senior to or on a parity with the
6% Preferred while there exists any arrearage in the payment of cumulative
dividends hereunder.
8. VOTING RIGHTS. Except as provided herein or as provided for by law, the
6% Preferred shall have no voting rights.
7
9. ATTORNEYS' FEES. Any holder of 6% Preferred shall be entitled to recover
from the Corporation the reasonable attorneys' fees and expenses incurred by
such holder in connection with enforcement by such holder of any obligation of
the Corporation hereunder, if such holder is the prevailing party in an action
or proceeding to compel such enforcement.
10. LIMITATION ON NUMBER OF CONVERSION SHARES. The Corporation shall not be
obligated to issue, in the aggregate, more than 3,150,000 shares of Common Stock
as presently constituted (the "Nasdaq Cap") upon conversion of the 6% Preferred,
if issuance of a larger number of shares would constitute a breach of the Rules
or Designation Criteria of the NASDAQ Stock Market (the "NASDAQ Rules"). Subject
to the obligation to effect certain redemptions pursuant to the last three
sentences of this Section, if further issuances of shares of Common Stock upon
conversion of the 6% Preferred would constitute a breach of the NASDAQ Rules
(i.e., all of the shares permitted to be issued under the Nasdaq Cap shall have
been so issued), then so long thereafter as such limitation shall continue to be
applicable and any shares of 6% Preferred are submitted for conversion such
shares shall receive in cash an amount equal to the Cash Conversion Amount
determined as provided in Section 4(f) hereof, in lieu of the Common Stock which
such shares would otherwise be entitled to receive upon conversion. Payment of
the Cash Conversion Amount shall be made no later than as specified in Section
4(f) and shall bear daily interest thereafter at the rate of one-tenth of one
percent per day until paid. The NASDAQ Cap shall be proportionately and
equitably adjusted in the event of stock splits, stock dividends, reverse stock
splits, reclassifications or other such events, in such manner as the Board of
Directors of the Corporation shall reasonably determine. If (A) the Corporation
is unable to obtain the requisite shareholder approval concerning the issuance
of shares of Common Stock upon conversion of the 6% Preferred to satisfy the
NASDAQ Rules prior to December 31, 1997, then (B) the Corporation shall
immediately redeem, at a "Special Redemption Price" equal to 110% of the
liquidation preference of such shares, the smallest number of Shares which is
sufficient, in the Corporation's reasonable judgment, such that following such
redemption, conversion of the remaining shares of 6% Preferred would not
constitute a breach of the Corporation's obligations under the NASDAQ Rules. Any
redemption effected pursuant to the preceding sentence shall require 15 days'
notice and the Redemption Date shall be not more than 15 days after the date
specified in Clause A of the preceding sentence. Such redemption shall be made
pro-rata. If there shall be a default in payment of the Special Redemption
Price, the amount so payable shall bear daily interest from and after the
Redemption Date at the rate of one-tenth of one percent per day until paid.
8