Exhibit 10.11
INPHONIC, INC.
$3,000,000
INVESTMENT AGREEMENT
SEPTEMBER 11, 2001
Funds Provided by
SPRING CAPITAL PARTNERS, L.P.
and
ARGOSY Investment Partners II, L.P.
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (this "Agreement") is entered into as of this
11th day of September, 2001 by and among: (1) INPHONIC, INC., a Delaware
corporation (the "Company"); (2) SPRING CAPITAL PARTNERS, L.P., a Maryland
limited partnership ("Spring Capital"); and (3) ARGOSY INVESTMENT PARTNERS II,
L.P., a Pennsylvania limited partnership ("Argosy").
RECITALS
The parties desire to set forth herein their understandings and agreements
pertaining to this transaction.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Spring Capital and
Argosy and each of their respective permitted successors and assigns with
respect to the Debentures or any of the Equity Interest (as these terms are
hereinafter defined) (each a "Holder" and collectively, the "Holders") and the
Company hereby agree as set forth below.
ARTICLE 1
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere herein, when
used herein, the following capitalized terms shall have the meanings indicated:
"Accounts" shall mean all of the Company's now owned and hereafter acquired
"accounts," as that term is defined in the Applicable UCC.
"Act of Bankruptcy" when used in reference to any Person, shall mean the
occurrence of any of the following with respect to such Person: (a) such Person
shall have made an assignment of all or substantially all of its assets for the
benefit of his or its creditors; (b) such Person shall have admitted in writing
his or its inability to pay his or its debts generally as they become due; (c)
such Person shall have filed a voluntary petition in bankruptcy; (d) such Person
shall have been adjudicated a bankrupt or insolvent; (e) such Person shall have
filed any petition or answer seeking for himself or itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future Applicable Law pertinent to such
circumstances; (f) such Person shall have filed or shall file any answer
admitting or not contesting the material allegations of a bankruptcy, insolvency
or similar petition filed against such Person; (g) such Person shall have sought
or consented to, or acquiesced in, the appointment of any trustee, receiver, or
liquidator of such Person of all or substantially all of the properties of such
Person; (h) sixty (60) days shall have elapsed after the commencement of an
action against such Person seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future Applicable Law without such action having been dismissed or without all
orders or proceedings thereunder affecting the
operations or the business of such Person having been stayed, or if a stay of
any such order or proceedings shall thereafter be set aside and the action
setting it aside shall not be timely appealed; or (i) sixty (60) days shall have
expired after the appointment, without the consent or acquiescence of such
Person of any trustee, receiver or liquidator of such Person or of all or
substantially all of the assets and properties of such Person without such
appointment having been vacated.
"Act of Dissolution" when used in reference to any Person (other than an
individual) shall mean the occurrence of any action initiating, or any event
that results in, the dissolution, liquidation, winding-up or termination of such
Person.
"Additional Warrants" shall mean those separate and detachable stock
purchase warrants that may be issued to the Holders pursuant to Section 4.25(i)
hereof.
"Additional Warrant Share(s)" when used in the singular, shall mean any
share of Common Stock acquired by a Holder pursuant to such Holder's exercise of
its rights under the Additional Warrants and, when used in the plural, shall
mean, collectively, all such shares.
"Affiliate" when used in reference to any Person, shall mean any Person
that, directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Person in question. For
purposes of this definition, "control" (including, with correlative meaning, the
terms "controlled by" and "under common control with"), as used with respect to
a Person, means the possession, directly or indirectly, of the power to direct
or cause the direction of management policies of such Person, whether through
ownership of voting securities, by contract or otherwise.
"Affiliated Group" shall have the meaning given to it in Section 3.10.
"Annual Financials" shall have the meaning given to it in Section 3.11(a).
"Applicable Law(s)" when used in the singular, shall mean any applicable
federal, state, local or foreign law, ordinance, order, regulation, rule or
requirement of any governmental or quasi-governmental agency, instrumentality,
board, commission, bureau or other authority having jurisdiction, and, when used
in the plural, shall mean all such applicable federal, state, local and foreign
laws, ordinances, orders, regulations, rules and requirements.
"Applicable UCC" shall mean the Uniform Commercial Code, as enacted in the
State of Maryland, as amended through the date hereof. Terms used herein which
are defined in the UCC and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the UCC. To the extent the
definition of any category or type of collateral is modified by any amendment,
modification or revision to the UCC, such modified definition will apply
automatically as of the date of such amendment, modification or revision.
"Asset Disposition" shall have the meaning given to it in Section 5.4.
"Business Plan" shall have the meaning given to it in Section 3.15.
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"Cash Equivalents" shall mean (i) securities issued or directly and fully
guaranteed or insured by United States Government or any agency or
instrumentality thereof having maturities of not more than 90 days from the date
of acquisition; (ii) time deposits, certificates of deposit and banker's
acceptances of any domestic commercial bank having capital and surplus in excess
of $200,000,000 having maturities of not more than 90 days from the date of
acquisition; (iii) repurchase obligations with a term of not more than seven
days for underlying securities of the type described in clause (i) and entered
into with any bank meeting the qualifications specified in clause (ii) above;
(iv) commercial paper having, at the time of acquisition thereof, the highest
credit rating obtainable from Standard & Poor's Rating Services or ▇▇▇▇▇'▇
Investors Service, Inc. and maturing within 90 days after the date of
acquisition; and (v) money market funds which invest at least 90% of their
assets in the types of securities and instruments described in clauses (i),
(ii), (iii) and (iv) above.
"Chattel Paper" shall mean, collectively, all of the Company's now owned
and hereafter acquired "chattel paper," (including "tangible chattel paper" and
"electronic chattel paper") as those terms are defined in the Applicable UCC.
"Charter" shall mean the Company's most recent Amended and Restated
Certificate of Incorporation, as amended from time to time, on file with the
Secretary of the State of Delaware (or similar organizational document in the
case of the Company's re-incorporation into another state).
"Closing" shall have the meaning given to it in Section 2.1.
"Collateral" shall mean, collectively, all of the now-owned and hereafter
acquired tangible and intangible property of the Company, including, without
limitation, all of the following: (a) all Accounts; (b) all Chattel Paper; (c)
all Equipment; (d) all Goods; (e) all Instruments; (f) all Inventory; (g) all
General Intangibles; (h) all Proceeds; (i) all Real Property; (j) all books,
records, computer software and logs relating to and necessary or appropriate to
the conduct of the Company's business and operation of any Future Business, and
including those relating to any of the foregoing; (k) all monies, Deposit
Accounts and rights to money of any kind; (l) commercial tort claims, if any,
described on Exhibit 1.1 hereto; (m) all Intellectual Property; (n) all
additions or accessions to any of the foregoing; (o) all substitutions for any
of the foregoing; and (p) all replacements, products and proceeds of the
foregoing.
"Common Stock" shall mean any or all (as the context may require) of the
shares of the authorized common stock, $0.01 par value per share, of the
Company.
"Company" shall mean InPhonic, Inc., a Delaware corporation.
"Company's Business" shall mean the provision of wireless enterprise
solutions and Virtual Private Wireless Networks for major corporations, affinity
groups and e-businesses.
"Company Constituent Documents" shall have the meaning given to it in
Section 3.1.
"Contracts" shall have the meaning given to it in Section 3.14.
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"Co-Sale Agreement" shall mean the Amended and Restated Right of First
Refusal and Co-Sale Agreement dated as of August 7, 2001, as may be amended from
time to time, between and among the Company and certain stockholders of the
Company listed on the signature pages thereto.
"Debentures" shall have the meaning given to it in Section 2.1.
"Deposit Accounts" shall have the meaning given to it in the Applicable
UCC.
"EBITDA" shall mean for any period, (a) earnings before interest expense,
taxes, depreciation and amortization, plus (b) the amount of any extraordinary
expenses incurred during any such period, minus (c) the amount of any
extraordinary gains, all calculated in accordance with GAAP. The EBITDA
calculation shall be based upon income statements certified by the Company's
independent certified public accountant for its last completed fiscal year.
"Environmental Law" shall have the meaning given to it in Section 3.24(b).
"Equipment" shall mean all of the Company's now owned and hereafter
acquired equipment and fixtures, and all replacements and substitutions therefor
and thereof, and all accessions thereto, including, without limitation, every
item of equipment that is or may be necessary or convenient in relation to the
operation of the Company's business or any Future Business, including: all
materials and equipment and all parts, substitutions, improvements, accessories,
attachments and additions thereto and therefor.
"Equity Interest" shall mean, collectively, the Warrants and all of the
Warrant Shares, the Additional Warrants and all of the Additional Warrant
Shares, if applicable, and the Redemption Warrants and all of the Redemption
Warrant Shares, if applicable.
"Event of Default" shall have the meaning given to it in Article 7.
"Exempt Transfers" shall have the meaning given to it in Section 3 in the
Co-Sale Agreement.
"First Anniversary Revenue Period" shall mean the twelve-month period ended
on August 7, 2002.
"Fully Diluted Capital Stock" shall mean all issued and outstanding
securities convertible into, exchangeable or exercisable for the capital stock
of the Company (including, without limitation, the Warrant Shares issued
pursuant to the Warrants, the total authorized option pool and any other
options, warrants, and rights to purchase Common Stock), calculated upon the
final closing of the Company's Series D Convertible Preferred Stock financing.
"Future Business(es)" when used in the singular, shall mean each business
in which the Company acquires any interest from and after the date of this
Agreement and, when used in the plural, shall mean all such businesses in which
the Company acquires any such interest; provided, however, that nothing
contained herein shall authorize the Company to acquire any interest in any
Future Business except as specifically permitted by the applicable terms of this
Agreement.
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"GAAP" shall mean United States generally accepted accounting principles,
consistently applied, for the period or periods in question.
"General Intangibles" shall mean, collectively, all of the Company's now
owned and hereafter acquired "general intangibles" (including "payment
tangibles" and "software"), as those terms are defined in the Applicable UCC.
"Goods" shall mean, collectively, all of the Company's now owned and
hereafter acquired "goods" (including "fixtures") as those terms are defined in
the Applicable UCC.
"Governmental Authority(ies)" when used in the singular, shall mean any
federal, state, local or foreign governmental or quasi-governmental
instrumentality, agency, board, commission or department or any regulatory
agency, bureau, commission or authority and, when used in the plural, shall mean
all such entities.
"Hazardous Material" shall have the meaning given to it in Section 3.24(b).
"Indebtedness" shall mean all indebtedness of the Company for borrowed
money.
"Indemnified Parties" shall have the meaning given to it in Section 6.3.
"Instruments" shall mean, collectively, all of the Company's now owned or
hereafter acquired "instruments" (including "promissory notes"), as those terms
are defined in the Applicable UCC.
"Intellectual Property" shall mean, collectively, all of the Company's now
owned and hereafter acquired intellectual property, including, without
limitation the following: (a) all (i) patents (including all rights
corresponding thereto throughout the world, and all improvements thereon and
interests under patent license agreements, including, without limitation, the
inventions and improvements described and claimed therein), (ii) licenses
pertaining to any patent, whether the Company is licensor or licensee, and (iii)
income, royalties, damages, payments, accounts and accounts receivable now or
hereafter due and/or payable under and with respect thereto, including without
limitation, damages and payments for past, present or future infringements
thereof; (b) all trademarks (including service marks, trade names and trade
secrets, and all goodwill associated therewith); (c) all copyrights (including
all renewals, extensions and continuations thereof); (d) all applications for
patents, trademarks or copyrights and all applications otherwise relating in any
way to the subject matter of such patents, copyrights and trademarks filed in
the United States Patent and Trademark Office or any similar office of any
foreign jurisdiction; (e) all patents, copyrights, trademarks or applications
therefor arising after the date of this Agreement and all rights to renew or
extend such patents, copyrights, trademarks and/or applications; (f) all
reissues, continuations, continuations-in-part and divisions of the property
described in the preceding clauses (a), (b), (c), (d) and (e), including,
without limitation, any claims by the Company against third parties for
infringement thereof; (g) any and all cash proceeds and/or non-cash proceeds of
any of the foregoing, including, without limitation, insurance proceeds, and all
supporting obligations and the security therefor or for any rights to payment;
and (h) all rights to ▇▇▇ in the Holders' own names or in the Company's name for
past, present and future infringements or violations of any such patents,
trademarks and copyrights.
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"Interim Financials" shall have the meaning given to it in Section 3.11(b).
"Inventory" shall mean, collectively, all of the Company's now owned and
hereafter acquired "inventory" as that term is defined in the Applicable UCC,
and all products, replacements and substitutions therefor and thereof, and all
accessions thereto.
"Investment" shall have the meaning given to it in Section 2.1.
"Investment Documents" shall mean, collectively, this Agreement, the
Debentures, the Co-Sale Agreement, the Investor Rights Agreement, the Security
Documents, the Warrants, the Additional Warrants (if applicable), the Redemption
Warrants (if applicable), and all other instruments and documents executed and
delivered in connection with the Investment.
"Investment Party(ies)" when used in the singular, shall mean the Company
or any other party (other than any of the Holders) to any of the Investment
Documents and, when used in the plural, shall mean the Company and all other
parties to any of the Investment Documents (other than any of the Holders).
"Investor Rights Agreement" shall mean the Amended and Restated Investor
Rights Agreement dated as of August 7, 2001, as may be amended from time to
time, between and among the Company and the stockholders of the Company listed
on the signature pages thereto.
"Knowledge" shall mean, with respect to the Company, (a) the actual
knowledge of any of the Company's officers, including without limitation, the
Company's chief executive officer, president, chief operating officer, chief
financial officer or general counsel, and (b) that which any of the Company's
officers reasonably should have known.
"Landlord Waiver(s)" shall have the meaning given to it in Section 2.2(c).
"Lead Investor" shall have the meaning given to it in Section 12.14(a).
"Leases" shall have the meaning given to it in Section 3.13.
"Licenses" shall mean, collectively, all rights, licenses, permits and
authorizations now or hereafter issued by any Governmental Authority in
connection with the operation or conduct of the Company's business or any Future
Business.
"Litigation Schedule" shall have the meaning given to it in Section 3.5.
"Mandatory Prepayment Event" shall mean any of the following events: (a) a
public offering of the Common Stock; (b) a Transfer of the Company's Business;
or (c) the issuance by the Company of equity securities constituting forty
percent (40%) or more of all equity of the Company after such issuance on a
fully-diluted basis (calculated as if all options included in the Company's
stock option pool (regardless of exercise price) and all other options, warrants
and convertible securities to purchase Common Stock had then been exercised).
"Material Adverse Change" shall mean any material adverse change or any
development involving a prospective material adverse change in or affecting the
general affairs, business,
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financial position, stockholders' equity or results of operations of the
Company, taken as a whole.
"Net Equity Value" shall mean the aggregate consideration to be received by
the Company in a transaction constituting a Transfer of the Company's Business,
less: (a) all liabilities of the Company (including, without limitation, all
outstanding principal and accrued interest owed pursuant to the Company's Senior
Debt and the Obligations hereunder), and (b) the Liquidation Preference (as
defined in the Charter) owed to the holders of all series of the Company's
preferred stock outstanding upon the consummation of such Transfer of the
Company's Business.
"Net Realized Revenues" for a Revenue Period shall have the definition
given to it in the Series D Purchase Agreement.
"1940 Act" shall have the meaning given to it in Section 3.33.
"Obligations" shall mean, collectively, all of the Company's indebtedness,
liabilities and obligations arising under this Agreement, each of the Security
Documents and the Debentures and any renewals, modifications and extensions
thereof, including, but not limited to, the principal, interest, late charges
and other sums now and hereafter due and owing under the Debentures and the
Security Documents, and any other obligations of the Company to any of the
Holders, including such other or additional financing that any of the Holders
may extend to the Company at any time in the Holders' sole discretion.
"Permitted Encumbrances" shall mean any lien, mortgage, security interest
or other encumbrance that results from any of the following: (a) the liens,
mortgages, security interests and other encumbrances created or arising pursuant
to this Agreement and the other Investment Documents; (b) liens for taxes and
assessments not delinquent or actively being contested in good faith by the
Company and for which the Company has adequate reserves; (c) deposits or pledges
for goods or services made in the ordinary course of the Company's business
including, without limitation, security deposits; (d) title of a bona fide
lessor of tangible personal property to the Company or the security interest of
a bona fide seller of tangible personal property to the Company (where the sale
or lease is not made in contravention of the terms of the Investment Documents);
(e) liens, mortgages or security interests securing purchase money obligations
(where the purchase money obligation is not undertaken in contravention of the
terms of the Investment Documents); (f) liens, mortgages, security interests or
other encumbrances securing the Senior Debt; and (g) liens, mortgages or
security interests securing the Company's property as expressly set forth as to
the amount, identity of the lender and the security interest or other collateral
therefor, all as listed on Exhibit 5.10 hereto.
"Person" shall mean any individual, corporation, partnership, joint
venture, limited liability company, unincorporated association, trust or other
legal entity.
"Prepayment Premium" shall have the meaning given to it in Section 2.3.
"Proceeds" shall have the meaning given to it in the Applicable UCC, and
shall include all cash and noncash proceeds (including insurance proceeds)
resulting from any complete or
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partial Transfer of the Collateral or any portion thereof or otherwise relating
to or generated by any of the Collateral.
"Qualified IPO" shall mean the closing of a firm commitment underwritten
public offering pursuant to a registration statement filed under the Securities
Act, covering the offer and sale of Common Stock for the account of the Company
in which (i) the public offering price per share is at least $4.125716915
(subject to adjustment for stock splits, reverse stock splits, dividends and the
like), and (ii) the aggregate net proceeds (after deduction of underwriter's
discounts and commissions) to the Company are at least $20,000,000.
"Real Property" shall mean, collectively, all real property owned by the
Company or in which the Company has a leasehold interest and all real property
hereafter acquired by the Company in fee or by means of a leasehold interest,
including all real property on which any of the Company's business or any Future
Business is now or hereafter conducted, together with all goods located on any
such real property that are or may become "fixtures" under the law of the
jurisdiction in which such real property is located.
"Redemption Warrant(s)" shall have the meaning given to it in Section
10.2(b).
"Redemption Warrant Share(s)" when used in the singular, shall mean any
share of Common Stock acquired by a Holder pursuant to such Holder's exercise of
its rights under its respective Redemption Warrant and, when used in the plural,
shall mean, collectively, all such shares.
"Returns" shall have the meaning given to it in Section 3.10.
"SBA" shall have the meaning given to it in Section 3.33.
"SBA Act" shall have the meaning given to it in Section 3.33.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Security Documents" shall have the meaning given to it in Section 2.2.
"Senior Credit Facility" shall mean that certain Loan and Security
Agreement to be executed by and between the Company and Imperial Bank.
"Senior Debt" shall mean all of the following, up to a maximum (in the
aggregate) of Five Million Dollars ($5,000,000): (a) the aggregate principal
indebtedness advanced from time to time under the Senior Credit Facility; (b)
all interest accrued and accruing on the aggregate principal outstanding under
the Senior Credit Facility from time to time; (c) all other reasonable fees or
monetary obligations owed under the Senior Credit Facility and any related
interest rate swap or hedge agreements; (d) all reasonable costs incurred by the
lender under the Senior Credit Facility in commencing or pursuing any
enforcement action(s) with respect to the amounts described in clauses (a)
through (c), including attorney's fees and disbursements; and (e) any advances
made by the lender under the Senior Credit Facility to protect any collateral
securing
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the Senior Debt. "Senior Debt" shall include all amendments, modifications and
refinancings with the same or another lender of the foregoing, provided such
amendments, modifications or refinancings do not (i) increase the applicable
pre-default and post-default interest rates payable thereon by more than 5%,
(ii) reduce the average term to maturity thereof by more than 25% from its
original average term, (iii) increase the aggregate principal amount outstanding
thereunder over the amount permitted by paragraph (a) of this definition, or
(iv) add to or amend the financial covenants thereunder to render such covenants
materially more restrictive.
"Series D Purchase Agreement" shall mean that certain Series D Convertible
Preferred Stock Purchase Agreement entered into as of August 7, 2001, by and
among the Company, Sterling Communications, Inc., and the Purchasers of the
Company's Series D Convertible Preferred Stock named on the signature pages
thereto, as may be amended from time to time.
"Third Party Claim" shall have the meaning given to it in Section 6.5.
"Transfer" shall mean the sale, assignment, lease, transfer, mortgaging,
encumbering or other disposition, whether voluntary or involuntary, and whether
or not consideration is received therefor, except for Permitted Encumbrances.
"Transfer of the Company's Business" shall mean one or more transactions
undertaken by the Company resulting in either: (a) the Transfer of twenty-five
percent (25%) or more of the assets of the Company to any other Person; (b) a
merger or consolidation of the Company with another Person where the Company is
not the surviving or successor entity, other than a merger or consolidation of
any Wholly-Owned Subsidiary with or into the Company; (c) a reverse merger in
which the Company is the surviving corporation but the Common Stock outstanding
immediately preceding the merger is converted by virtue of the merger into other
property; or (d) the issuance or Transfer of the Company's capital stock which
results in one or more Persons (other than the stockholders of the Company that
are existing as of the date hereof) either owning in excess of a majority of the
then outstanding capital stock of the Company or being able to elect a majority
of the board of directors of the Company.
"Warrant Redemption Price" shall mean the greater of (a) the fair market
value per share of the Common Stock (underlying the Warrants and/or Additional
Warrants, as the case may be) to be redeemed, based upon an independent
valuation conducted by a nationally recognized investment banking firm mutually
agreed upon by the Holder and the Company, the cost of which will be borne by
the Company; provided that the Company, the Holder and the investment banking
firm shall make all fair market value determinations by (i) taking into
consideration the level of executive salaries, and if excessive relative to
industry standards, appropriate adjustments shall be made to the fair market
value to account for such excessive salaries, but (ii) not taking into
consideration any adjustments for discounts including, but not limited to,
adjustments made with respect to any minority interest, lack of control, or lack
of marketability; (b) an amount equal to (i) the Company's EBITDA multiplied by
seven, plus (ii) cash, plus (iii) Cash Equivalents, minus (iv) funded
indebtedness, divided by (v) the number of shares of Fully Diluted Capital Stock
as of the date of the calculation; or (c) an amount equal to (i) the average of
the previous three years of the Company's EBITDA multiplied by seven, plus (ii)
cash, plus (iii) Cash Equivalents, minus (iv) funded indebtedness, divided by
(v) the number of shares of Fully Diluted Capital Stock as of the date of the
calculation.
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"Warrants" shall mean those separate and detachable stock purchase warrants
issued to the Holders pursuant to Section 2.4(a) hereof.
"Warrant Share(s)" when used in the singular, shall mean any share of
Common Stock acquired by a Holder pursuant to such Holder's exercise of its
rights under either of the Warrants and, when used in the plural, shall mean,
collectively, all such shares.
"Wholly-Owned Subsidiary(ies)" shall mean any and all subsidiaries of the
Company now existing or hereafter created in which the Company holds all legal
and beneficial interests that executes a joinder to this Agreement and any other
Investment Documents, as appropriate, evidencing its or their agreement to be
bound by the terms hereunder and thereunder.
"Year-End Revenue Period" shall mean the twelve months ended December 31,
2001.
ARTICLE 2
TERMS OF INVESTMENT
2.1 Investment. At the closing under this Agreement (the "Closing"), the
Company shall borrow from the Holders, and the Holders shall invest in the
Company, the aggregate principal sum of Three Million Dollars ($3,000,000) (the
"Investment"), such indebtedness to be evidenced by, and to be repaid according
to the terms of those certain debentures (the "Debentures"), substantially in
the forms attached hereto as Exhibit 2.1(a) and Exhibit 2.1(b).
2.2 Collateral. Repayment of the Debentures and other Obligations shall be
secured ratably by liens on, and security interests in, all of the Collateral.
To evidence and create the above-described liens and security interests, the
Company shall execute and deliver, or cause to be executed and delivered, to the
Holders at Closing (or within such other period described below) all of the
following documents and such additional documents as the Holders or their
counsel may reasonably deem to be necessary or appropriate (collectively, the
"Security Documents"):
(a) Security Agreement. A security agreement in the form attached
hereto as Exhibit 2.2(a), covering all of the Collateral;
(b) UCC's. UCC-1 Financing Statements in form and substance acceptable
to the Holders to be filed in each of the offices in each of the jurisdictions
described in the Security Agreement, as attached hereto as Exhibit 2.2(b);
(c) Landlord Waivers. Within sixty (60) days after the Closing, those
certain landlord waivers for the respective properties located at: (i) ▇▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇., ▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇, and (ii) ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇'▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇, and any renewals or extensions thereof
or substitutions or replacements therefor, pursuant to one or more separate
instruments substantially in the form attached hereto as Exhibit 2.2(c), with
the consent of the lessor thereto as set forth therein (the "Landlord
Waiver(s)");
(d) Key Man Life Insurance. Within thirty (30) days after the Closing,
a collateral assignment of term life insurance policies insuring the respective
lives of ▇▇▇▇▇
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▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇, each in the aggregate original amount of Two
Million Dollars ($2,000,000), with the consent of the insurance company and the
beneficiaries, as necessary, which assignment shall be substantially in the form
attached hereto as Exhibit 2.2(d). The proceeds of such term life insurance
policies shall first be used to search for, hire and compensate a replacement
mutually agreeable to the Holders and the Company, and then shall be payable to
Holders, first to satisfy accrued and unpaid interest due and owing under the
Debentures, and then to satisfy outstanding principal due and owing under the
Debentures.
(e) Intellectual Property. A collateral assignment of all of the
Company's Intellectual Property, pursuant to a separate instrument substantially
in the form attached hereto as Exhibit 2.2(e).
The liens and security interests in the Collateral created by the Security
Documents shall be continuing in nature, and, to the extent permitted by
Applicable Law, shall attach when: (i) the Company has executed and delivered
the Security Documents; (ii) the Company has acquired rights in the Collateral;
and (iii) any of the Holders has made a complete or partial disbursement of
proceeds under the Debentures to the Company, the Company's designated payee, or
an escrow agent. Upon payment in full of all amounts owed pursuant to the
Debentures, the Holders shall execute and deliver to the Company any documents
prepared and provided at the Company's expense and reasonably requested by the
Company in order to terminate the Holders' liens and security interests in the
Collateral.
2.3 Prepayment. Payment of any installment of principal or interest under
the Debentures may be made prior to the due date thereof, as provided in the
Debentures.
2.4 Warrants. At the Closing, the Company shall issue and sell to each of
Spring Capital and Argosy a Warrant, such Warrants to be substantially in the
forms attached hereto as Exhibit 2.4(a)(i) and Exhibit 2.4(a)(ii), respectively.
Spring Capital's Warrant shall entitle Spring Capital to purchase, in the
aggregate, the number of shares of Common Stock which represents between 0.9375%
and 3% of the Fully Diluted Capital Stock of the Company, pursuant to the terms
of such Warrant. Argosy's Warrant shall entitle Argosy to purchase, in the
aggregate, the number of shares of Common Stock which represents between 0.3125%
and one percent (1%) of the Fully Diluted Capital Stock of the Company, pursuant
to the terms of such Warrant. The exercise price for each of the Warrants shall
be equal to One Cent ($0.01) per Warrant Share. Each of the Warrants shall
expire on the earlier to occur of (a) that date which is ten (10) years from the
date of the Closing, or (b) upon a Qualified IPO.
2.5 Attorney-in-Fact. The Company hereby appoints Spring Capital as its
attorney-in-fact, in the name of the Company and on its behalf, for the sole
purpose of signing financing statements, continuation statements or other
recordable documents reasonably necessary to provide notice of the security
interest granted herein in the applicable public records. This power is coupled
with an interest and is irrevocable so long as any monetary Obligations remain
outstanding. This appointment may be discharged by any officer or attorney of
such attorney-in-fact.
11
2.6 Closing. The Closing shall occur on or before the close of business on
September 14, 2001, unless extended in writing by each of Spring Capital and
Argosy, in their sole discretion.
2.7 Conditions Precedent to the Obligations of Spring Capital and Argosy.
The obligation of Spring Capital and Argosy to make the Investment is subject to
the satisfaction of the following conditions precedent at or prior to the
Closing (unless waived in writing by Spring Capital and Argosy prior to
Closing):
(a) Closing Bring Down. Each of the representations and warranties
contained in this Agreement must be true and accurate in all material respects
as of the date of Closing, and the Company and all other Investment Parties (if
any) must have performed all of their respective obligations hereunder,
including execution and delivery of all of the documents, instruments, opinions
and certificates required by this Agreement in such forms as are satisfactory to
Spring Capital and Argosy and their counsel;
(b) Due Diligence. Spring Capital and Argosy shall have completed
business, legal, accounting and management due diligence that reflects favorably
on the Company, its management and the market for the Company's business
generally. In this regard, the Company covenants and agrees to furnish to each
of Spring Capital and Argosy such information as Spring Capital and Argosy may
reasonably request in order to enable them to complete the required due
diligence;
(c) Deliveries. Spring Capital and Argosy shall have received each of
the following items:
(i) the Debentures, duly executed by the Company;
(ii) each of the Security Documents, duly executed by the
Company;
(iii) the Amendment to the Investor Rights Agreement, duly
executed by the Company and the necessary signatories thereto, substantially in
the form attached hereto as Exhibit 2.7(c)(iii);
(iv) the Amendment to the Co-Sale Agreement, duly executed by the
Company and the necessary signatories thereto, substantially in the form
attached hereto as Exhibit 2.7(c)(iv);
(v) an opinion of counsel, duly executed by counsel to the
Company, substantially in the form attached hereto as Exhibit 2.7(c)(v); and
(vi) payment of all fees, expenses and other obligations of the
Company which are then due pursuant to Article 6 hereof;
(d) Series D Preferred Stock Financing Proceeds. The Company shall
have received gross proceeds of at least Eight Million Dollars ($8,000,000) from
the issuance and sale of its Series D Convertible Preferred Stock;
12
(e) Pro Forma Financial Statements. Spring Capital and Argosy shall
have received from the Company a pro forma balance sheet dated as of a date
reasonably near the Closing, showing hypothetically the financial condition of
the Company after Closing, prepared in accordance with GAAP (or prepared in a
manner reasonably acceptable to Spring Capital and Argosy);
(f) Investment Approval. Spring Capital and Argosy shall have received
formal, internal approval of the Investment;
(g) Material Adverse Change. Prior to funding, there shall have
occurred no Material Adverse Change in the business or condition of the Company
or event which could adversely affect the ability of either the Company or
Spring Capital or Argosy to perform their respective obligations under the
Security Documents or this Agreement;
(h) Senior Debt. The Investment and the rights of each of Spring
Capital and Argosy under the Debentures, this Agreement and the Security
Documents shall be subordinate, as to lien priority and right of payment with
respect to Collateral common to both, only to the Senior Debt, such
subordination to be evidenced by a Subordination and Intercreditor Agreement
between Spring Capital, Argosy and Imperial Bank, the form of which shall be
reasonably acceptable to such parties;
(i) SBA Documents. Completion and execution by the Company of all SBA
forms provided to the Company by Spring Capital and Argosy; and
(j) Other Documents. The provision and/or execution of such other
documents relating to the transactions contemplated by this Agreement as either
Spring Capital and Argosy or their special counsel may reasonably request.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce the Holders to enter into this transaction, the Company
represents and warrants to the Holders as of the date hereof (which
representations and warranties shall survive the execution and delivery of this
Agreement and the funding of the Investment) as set forth below.
3.1 Organization; Good-Standing. The Company is a corporation duly formed,
validly organized and in good standing in the jurisdiction of its formation.
Attached hereto as Exhibit 3.1 are true, correct and complete copies of the
Company's Charter, by-laws, all other constituent documents of the Company, and
all amendments and supplements to any of the foregoing (collectively, the
"Company Constituent Documents"). All of the Company Constituent Documents are
in full force and effect as of the date hereof.
3.2 Qualification. The Company is duly qualified to conduct business as it
is currently being conducted and, except where failure to be qualified would not
reasonably be expected to cause a Material Adverse Change, is in good standing
as a foreign corporation in all jurisdictions in which the nature of its
business or location of its owned and leased property and assets requires such
qualification, evidence of which is attached hereto as Exhibit 3.2.
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3.3 Power and Authority. The Company has full power and authority to enter
into this Agreement and each of the other Investment Documents, to incur the
Obligations as contemplated hereby, and to carry out the provisions of this
Agreement and each of the other Investment Documents, and the Company has the
full power and authority to issue the Warrants and the Warrant Shares. The
Company has taken all action necessary for the execution and delivery of this
Agreement and each of the other Investment Documents and for the performance by
the Company of each of its obligations hereunder and thereunder, as evidenced by
corporate resolution(s) or other authorization attached hereto as Exhibit 3.3.
3.4 Enforceability. Upon execution and delivery by each of the parties
thereto, this Agreement and each of the other Investment Documents shall be the
legal, valid and binding obligations of the Company and shall be enforceable
against the Company in accordance with their respective terms.
3.5 Litigation. The Company is not a party to nor has been, to the
Company's Knowledge, threatened by, any suits, actions, claims, investigations
by Governmental Authorities or legal, administrative, arbitration or mediation
proceedings, except as set forth in the schedule of litigation attached hereto
as Exhibit 3.5 (the "Litigation Schedule"). The Company has no Knowledge of any
basis or grounds for any such suit, action, claim, investigation or proceeding.
3.6 Orders; Decrees; Judgments. There are no outstanding orders,
judgments, writs, injunctions or decrees of any court, Government Authority or
arbitration or mediation panel or tribunal against or affecting the Company, any
of the Collateral or any of the other properties, assets or business of the
Company.
3.7 Non-Contravention. Except for matters set out in the Litigation
Schedule, (a) the Company is not in breach of, default under, or in violation of
any Applicable Law, decree or order that may cause a Material Adverse Change; or
(b) the Company is not in breach of, default under, or in violation of any deed,
lease, loan agreement, commitment, bond, note, deed of trust, restrictive
covenant, license, indenture, contract or other agreement, instrument or
obligation to which it is a party or by which it is bound or to which any of its
respective assets (including, but not limited to, the Collateral) is subject
that may cause a Material Adverse Change. Neither the execution and delivery of
this Agreement and the Investment Documents nor the performance by the Company
of its respective obligations hereunder and thereunder will cause any such
breach, default or violation or will require the consent or approval of any
court or Governmental Authority, except as expressly contemplated by the terms
of this Agreement.
3.8 Company's Business. The Company is engaged in the Company's Business
and no other business or businesses.
3.9 Title. Other than the Permitted Encumbrances, the Company has good,
complete, indefeasible and marketable title to, and ownership of, all of the
Collateral and to all other real or personal property it purports to own (if
any), free and clear of all liens, defects, claims, security interests and
encumbrances.
3.10 Taxes.
14
(a) Generally. The Company and all members of its affiliated group, as
that term is defined in Section 1504(a) of the Internal Revenue Code of 1986, as
amended (in this section, the "Affiliated Group") have filed all tax returns
(federal, state, local and foreign) that are required to be filed and has duly
paid or fully reserved for all taxes or installments thereof (including any
interest or penalties) as and when due which have or may become due pursuant to
said returns or pursuant to any assessment received by the Affiliated Group
(collectively, the "Returns"), or filed valid extensions for the filing of such
Returns.
(b) No Open Returns. No federal, state, local, foreign or other
Returns of any member of the Affiliated Group, for tax years that remain open
under any applicable statute of limitations, have been examined by the Internal
Revenue Service or other tax authorities and no deficiencies have been asserted
or assessments made as a result of examinations (including all penalties and
interest); there are no waivers, agreements or other arrangements providing for
any extension of time with respect to the assessment or collection of any unpaid
tax, interest or penalties relating to any member of the Affiliated Group; no
issues have been raised by (or are currently pending before) the Internal
Revenue Service or any other taxing authority in connection with any of the
Returns which could reasonably be expected to have a material adverse effect on
the financial condition of the Company, if decided adversely to the Company, nor
are there any such issues which have not been so raised but if so raised by the
Internal Revenue Service or any other taxing authority in connection with any of
the Returns could, in the aggregate, reasonably be expected to have such a
material adverse effect.
(c) Excess Parachute Payments. The Company has not made, has not
become obligated to make, nor will, as a result of the transactions contemplated
by this Agreement, make or become obligated to make, any "excess parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
amended.
(d) Deferred Intercompany Transactions. The Affiliated Group has not
engaged in any "deferred intercompany transactions" within the meaning of
Section 1.1502-13 of the regulations promulgated under the Internal Revenue Code
of 1986, as amended.
(e) True Copies of Returns. The Company has delivered to Spring
Capital true, correct and complete copies of all Returns, reports or extensions
of the filing of Returns of the Affiliated Group for each of the most recent
three (3) full taxable years as of the Closing, copies of which are attached
hereto as Exhibit 3.10; and all information set forth on such Returns is true,
complete and accurate.
3.11 Financial Condition.
(a) Annual Financials. The Company has provided to Spring Capital its
unaudited financial statements summarizing the financial condition and results
of operation of the Company's Business for the as of and for the year ended
December 31, 2000 (the "Annual Financials"). The Annual Financials, together
with the notes thereto, were prepared in accordance with GAAP, except as
disclosed therein, are complete and correct in all material respects, and fairly
present the financial condition of the Company as of December 31, 2000 and the
operating results of the Company during the period indicated therein.
15
(b) Interim Financials. The Company has provided to Spring Capital its
unaudited financial statements summarizing the financial results of operation of
the Company at July 31, 2001 and for the seven (7)-month period then ended (the
"Interim Financials"). The Interim Financials are complete and correct in all
material respects, and fairly present the financial condition of the Company as
of July 31, 2001 and the operating results of the Company during the period
indicated therein, subject to normal recurring year-end audit adjustments and
the absence of all footnotes required under GAAP.
3.12 Solvency. As of the date hereof, giving effect to the transactions
contemplated by this Agreement, the present fair saleable value of the Company's
assets is greater than the amount required to pay the Company's total
indebtedness (contingent or otherwise), and is greater than the amount that will
be required to pay such indebtedness as it matures and as it becomes absolute
and matured. The transactions contemplated hereby were effectuated without
actual intent to hinder, delay or defraud present or future creditors of the
Company; it is the Company's express intention that it will maintain a solvent
financial condition, giving effect to the Obligations incurred hereunder, as
long as any of the Obligations remain outstanding or the Company is obligated to
the Holders in any other manner whatsoever. Giving effect to the transactions
contemplated by this Agreement, the Company has sufficient capital to carry on
its business and transactions as now conducted and as planned to be conducted in
the future.
3.13 Material Leases. Attached hereto as Exhibit 3.13 is an accurate and
complete list of all leases of Real Property and all other material leases to
which the Company is a party or by which the Company or any of the Company's
assets is bound, together with all amendments or supplements thereto
(collectively, the "Leases"). True and complete copies of each of the Leases
have been provided to Spring Capital prior to the date hereof. Each of the
Leases is valid, binding and enforceable in accordance with its terms and
remains in full force and effect. The Company is not in default or alleged to be
in default with respect to any of its obligations under any of the Leases (nor
would be in default or alleged to be in default with the giving of notice,
passage of time, or both), and, to the Company's Knowledge, no party other than
the Company is in default with respect to such party's obligations under any of
the Leases (or would be in default or alleged to be in default with the giving
of notice, passage of time, or both), which in any event could reasonably be
expected to cause a Material Adverse Change. The Company's possession of any
property leased by it has not been disturbed, nor has any claim been asserted
against the Company that is or could be adverse to the Company's interests under
any of the Leases. None of the Leases is subject to any rights of set-off,
recoupment or similar deduction or offset and, except as noted on Exhibit 3.13
attached hereto, the Landlord Waivers will not impair or conflict with the
validity or enforceability of any of such Leases. The Company has not assigned
or encumbered any of its rights, title or interest in or under any of the Leases
nor agreed to any oral modifications of any of the provisions of any of the
Leases other than liens granted therein in favor of the Holders and liens
granted therein in favor of the Senior Debt.
3.14 Material Contracts. Attached hereto as Exhibit 3.14 is an accurate and
complete list of all material contracts representing five percent (5%) or more
of the Company's total revenue or volume for the seven (7) months ended July 31,
2001, to which the Company is a party or by which the Company or any of the
Company's assets is bound (collectively, the "Contracts"). True and complete
copies of each of the Contracts have been provided or made available to Spring
Capital prior to the date hereof. Each of the Contracts is valid, binding and
16
enforceable against the Company in accordance with its terms and remains in full
force and effect. The Company is not in default or alleged to be in default with
respect to any of its obligations under any of the Contracts (nor would be in
default or alleged to be in default with the giving of notice, passage of time,
or both), and, to the best of the Company's Knowledge, no party other than the
Company is in default with respect to such party's obligations under any of the
Contracts (or would be in default or alleged to be in default with the giving of
notice, passage of time, or both). No claim has been asserted against the
Company that is or could be materially adverse to the Company's interests under
any of the Contracts. None of the Contracts is subject to any rights of set off,
recoupment or similar deduction or offset and, except as noted on Exhibit 3.14
attached hereto, collateral assignment of the Company's rights under each of the
Contracts will not impair or conflict with the validity or enforceability of any
of the Contracts. The Company has not assigned or encumbered any of its rights,
title or interest in or under any of the Contracts nor agreed to any oral
modifications of any of the provisions of any of the Contracts other than liens
granted therein in favor of the Holders and liens granted therein in favor of
the Senior Debt.
3.15 Other Document Representations. Attached hereto as Exhibit 3.15 is a
true, correct and complete copy of the Company's business plan, offering
circular, private placement memorandum or similar document (collectively, the
"Business Plan"), updated and supplemented through the Closing Date. All
information contained in the Business Plan does not, as of the date of this
Agreement, contain any untrue statement of material fact nor omit to state a
material fact necessary to make the statement not misleading.
3.16 Projections. Attached hereto as Exhibit 3.16 are five (5)-year
projections for the Company (the "Projections"). The Company makes no
representation or warranty concerning the accuracy of the Projections, except
that all Projections were prepared in good faith by the Company's management
based upon assumptions they believed to be reasonable under the circumstances at
the time made.
3.17 No Untrue Statements or Material Omissions. No statement in writing
furnished by the Company to Spring Capital or Argosy in connection with the
transactions contemplated herein contains any untrue statement of material fact
or omits to state a material fact necessary to make the statement, in the light
in which it was made, not misleading in any material respect.
3.18 Management History. To the Knowledge of the Company, no officer or
director of the Company has been convicted of any felony criminal offense, has
been the subject of an Act of Bankruptcy, or has served as an officer, director,
general partner, member or manager of any Person at the time such Person became
the subject of an Act of Bankruptcy.
3.19 Company Officers, Directors, and Affiliates. Attached hereto as
Exhibit 3.19 is an accurate and complete list of all directors, officers, and
Affiliates of the Company. Other than the Persons listed in Exhibit 3.19, there
are no other Persons involved in the management of any portion of the Company's
business or affairs.
3.20 Other Debts. Except for (a) the liabilities listed in the Annual
Financials and Interim Financials attached hereto as Exhibit 3.11(a) and Exhibit
3.11(b), respectively, (b) the
17
matters set out in the Litigation Schedule in Exhibit 3.5, (c) liabilities
arising under the Contracts, and (d) the Senior Debt, the Company has no
material indebtedness or liabilities of any nature (whether liquidated or
unliquidated, mature or not yet mature, absolute or contingent, secured or
unsecured), arising out of any transaction entered into or any state of facts
existing prior hereto, including, without limitation, indebtedness or
liabilities on account of taxes or government charges, penalties, interest or
fines thereon or in respect thereof, and the Company does not have any Knowledge
of any basis for any claim against the Company as of the date of this Agreement
or of any debt or liability other than those described in this section.
3.21 Ownership and Control. Attached hereto as Exhibit 3.21 is an accurate
and complete list of the following information: (a) the authorized
capitalization of the Company as of the date hereof; (b) the number of shares of
each class of the Company's issued capital stock and the number of outstanding
shares thereof; (c) a description of all convertible securities and all options,
warrants and similar rights held with respect to the Company's capital stock;
(d) the names of the record owners of all such shares of capital stock and all
such convertible securities, options, warrants and similar rights; and (e) the
number of shares held by each such record owner. All shares of capital stock of
the Company and all convertible securities, options, warrants and similar rights
held with respect to the Company's capital stock have been duly authorized and
validly issued, are fully paid and nonassessable (in the case of capital stock),
and are owned of record and, to the Company's Knowledge, beneficially, as set
forth on Exhibit 3.21 attached hereto. Except as listed in Exhibit 3.21 attached
hereto, there are no outstanding options, warrants, convertible securities or
other stock purchase rights issued by the Company as of the date hereof, and to
the Company's Knowledge, there are no sale agreements, pledges, proxies, voting
trusts, powers of attorney or other agreements or instruments binding upon any
of the Company's stockholders with respect to beneficial and record ownership
of, or voting rights with respect to, any of the Company's capital stock as of
the date hereof.
3.22 No Material Change. Except as set forth on Exhibit 3.22, since July
31, 2001, the Company has not: (a) suffered any Material Adverse Change; (b)
entered into any material transactions or incurred any debt, obligation or
liability (whether liquidated or unliquidated, mature or not yet mature,
absolute or contingent, secured or unsecured) other than the Obligations and
obligations and liabilities arising in the ordinary course of the Company's
business; (c) sustained any material loss or damage to its Real Property or
personal property, whether or not insured; (d) suffered any material
interference with its business or operations; and (e) other than in the ordinary
course of business, made any Transfer, abandonment or other disposition of any
of its Real Property or personal property or any interest therein or relating
thereto, that is material to the financial position of the Company.
3.23 No Side Agreements. The Company is not, and to the Knowledge of the
Company, none of the officers, directors, stockholders or managers of the
Company are, party to any agreement, either written or oral, with any Person
(including Spring Capital and Argosy) whereby the Company or any of the
officers, directors, stockholders or managers of the Company, acting in such
capacities as to the Company, have agreed to do anything beyond the requirements
of formal, written contracts executed by the Company. Other than this Agreement,
the Contracts and the other Investment Documents, and any documents relating to
the Permitted Encumbrances, the Company is not, and to the Knowledge of the
Company, none of the officers, directors, stockholders or managers of the
Company is not, a party to any agreement calling for
18
any action by the Company or such party outside the ordinary course of the
Company's Business. To the Company's Knowledge, there exists no agreement or
understanding calling for any payment or consideration from a customer or
supplier of the Company to any officer, director, stockholder or manager of the
Company or to any Affiliates of such Persons, with respect to any transaction
between the Company and such supplier or customer. No Affiliate of the Company,
officer, director or manager, nor any Affiliates of such Persons, directly or
indirectly, transacts any business with the Company.
3.24 Legal Compliance.
(a) Generally. To its Knowledge, the Company is not in violation of
any Applicable Law that would apply to it or to its business, the violation of
which would cause a Material Adverse Change.
(b) Environmental Legal Compliance. To its Knowledge, without limiting
the generality of the representation and warranty made in subsection (a) above,
the Company is not in violation of any applicable Environmental Law, which
violation would cause a Material Adverse Change, and neither the Company nor, to
the Knowledge of the Company, any of the Company's agents, contractors or
employees has been notified of any action, suit, proceeding or investigation
which calls into question compliance by the Company with any Environmental Laws
or which seeks to suspend, revoke or terminate any license, permit or approval
necessary for the generation, handling, storage, treatment or disposal of any
Hazardous Material. The Company has not released or waived the liability of any
previous owner, lessee, or operator of the Real Property or any party which may
be potentially responsible for the storage, presence, release, discharge or
disposal of Hazardous Materials from or on the Real Property. As used in this
Agreement, the term "Environmental Law" shall mean, collectively, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. (S)9601 et seq.; the Solid Waste Disposal Act, as amended,
42 U.S.C. (S)6901 et seq. including the Resource Conservation and Recovery Act
of 1976, as amended, 42 U.S.C. (S)6901 et seq.; the Clean Water Act, as amended,
42 U.S.C. (S)1251 et seq.; the Clean Air Act, as amended, 42 U.S.C. (S)7401 et
seq.; any "superfund" or "superlien" law; and any other Applicable Law
regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous waste, substance or material, and
the term "Hazardous Material" shall mean and include any hazardous, toxic or
dangerous waste, substance or material, the generation, handling, storage,
disposal, treatment or emission of which is subject to any Environmental Law.
(c) Securities Law Compliance. To its Knowledge, the Company has not
directly, or through any agent, sold, offered for sale or solicited offers to
buy any security (as defined in the Securities Act) which could reasonably be
expected to be integrated with the sale of the Debentures or the Warrants to
Spring Capital and Argosy pursuant to this Agreement in a manner that would
require the registration under the Securities Act or any other securities laws
or engaged in any form of general solicitation or general advertising (as those
terms are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section 4(2) of the Securities
Act or any applicable state securities laws; nor is it necessary in connection
with the offer, sale and delivery of the Debentures or the Warrants to register
such instruments under the Securities Act or any other state securities laws
(except in connection with filings of a Form D under the Securities Act and
similar filings under state blue
19
securities laws) or, with respect to the Debentures, to qualify any indenture
under the Trust Indenture Act of 1939, as amended.
3.25 Employee Benefit Matters. There is no existing single-employer plan as
defined in Section 4021(a) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") as to which the Company is, or immediately after the
Closing will be, an "employer" or a "substantial employer" as defined in
Sections 3(5) and 4001(a)(2) of ERISA, respectively. Attached hereto as Exhibit
3.25 is an accurate and complete list of each plan described in Section 4021(a)
of ERISA, as to which the Company is assuming any liability or will be liable to
make contributions to or liable for the payment of benefits. The Company has
delivered to Spring Capital true and complete copies of each of the plans listed
on Exhibit 3.25 attached hereto. To the Knowledge of the Company, there have
been no "reportable events" as set forth in Section 4043(b) of ERISA with
respect to any such plan, and no termination of any such plan since the
effective date of ERISA which could result in any tax, penalty or liability
being imposed upon the Company. The Company has not participated in, and the
execution and delivery of this Agreement by the Company will not involve, any
"prohibited transaction" (as defined in Section 4975 of the Internal Revenue
Code of 1986, as amended) that could subject the Company to any tax or penalty
imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. To the
Knowledge of the Company, no predecessor-in-interest to the Company has
participated in any "prohibited transaction" (as defined in Section 4975 of the
Internal Revenue Code of 1986, as amended) that could subject the Company to any
tax or penalty imposed by Section 4975 of the Internal Revenue Code of 1986, as
amended. Since the effective date of ERISA, neither the Company, nor, to the
Knowledge of the Company, any predecessor-in-interest to the Company, has
incurred any "accumulated funding deficiency," as such term is defined in
Section 302 of ERISA, to which the Company could be subject or for which it
might be liable. The Company is not, and immediately after the Closing will not
be, a party to, and none of the operations of the Company is, or after the
Closing will be, covered by, a "multi-employer plan," as defined in Section
3(37) of ERISA.
3.26 Collective Bargaining. Except as set forth on Exhibit 3.26, the
Company is not a party to or subject to any union contracts. There are no labor
disputes pending or, to the Knowledge of the Company, threatened against the
Company or, to the Knowledge of the Company, between the Company and its
employees which have affected, or so far as the Company can reasonably foresee,
may affect, materially and adversely, the business or condition of the Company.
3.27 Employees. Attached hereto as Exhibit 3.27 is an accurate and complete
list of all employment and compensation contracts, including all retirement
benefit agreements not disclosed on Exhibit 3.25, between the Company and
officers and executives of the Company. The Company has delivered to Spring
Capital accurate and complete copies of all such contracts. No officer,
executive or other key employee of the Company has advised the Company (orally
or in writing) within the last ninety (90) days prior to Closing that he or she
intends to terminate employment with the Company, as applicable.
3.28 Insurance. Attached hereto as Exhibit 3.28 is an accurate and complete
list of all insurance policies and binders presently providing coverage to the
Company or any of its assets, including all insurance providing coverage with
respect to any of the Collateral. The Company
20
has furnished to Spring Capital appropriate insurance certificates and accurate
and complete copies of the insurance binders or policies for all of the
insurance listed in Exhibit 3.28.
3.29 Licenses. Simultaneously with or prior to the Closing, the Company
shall have acquired good title to all of the Licenses, and all such Licenses are
in full force and effect and valid. The Licenses, copies of which are attached
hereto as Exhibit 3.29, constitute all of the licenses, permits, approval and
authorizations needed to operate the Company's business from and after the
Closing in compliance with all Applicable Laws.
3.30 Subsidiaries. Other than those entities listed on Exhibit 3.30, the
Company has no subsidiaries, Affiliates, partnerships nor any other commonly
controlled or related entities.
3.31 Intellectual Property. The Company owns, or possesses adequate rights
to use, all Intellectual Property necessary for the conduct of its business,
which is set forth on Exhibit 3.31, and neither the Company nor any of its
officers have received any notice of conflict with, or infringement of, the
asserted rights of others with respect to any such Intellectual Property, and
the Company has no Knowledge of any reasonable basis therefor.
3.32 SBA Forms and Representations. Attached hereto as Exhibit 3.32(a),
Exhibit 3.32(b), Exhibit 3.32(c), and Exhibit 3.32(d), respectively, are
accurate and complete copies of the Size Status Declaration (SBA Form 480), the
Assurance of Compliance for Non-Discrimination (SBA Form 652), the Portfolio
Financing Report (SBA Form 1031), and the Economic Impact Assessment executed by
the Company. Each of the representations, statements and certifications made in
each of such SBA forms is accurate and complete and does not fail to state a
material fact necessary to make such representations, statements and
certifications not misleading. The Company is a "small business concern" as
defined in the Small Business Investment Act of 1958, as amended (the "SBA
Act"), and the rules and regulations of the U.S. Small Business Administration
(the "SBA") issued or promulgated thereunder. There exists no agreement,
expressed or implied, no condition, statement of facts or relationship between
the Company and any other entity or entities which would prevent it from
qualifying as a "small business concern" under the SBA Act.
3.33 Investment Company Act Representations. The Company is not, and does
not intend to become, an "investment company," as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Company is
not, and to the Company's Knowledge, none of the Investment Parties, or any of
the respective officers, directors, partners or controlling persons of any of
them is an "associate" of either Spring Capital or Argosy, as such terms are
defined in Section 107.50 of the amended Regulations promulgated under the SBA
Act, nor an "affiliated person" of either of Spring Capital or Argosy, as such
term is defined in Section 2(a)(3) of the 1940 Act.
ARTICLE 4
AFFIRMATIVE COVENANTS
Until all of the Obligations have been satisfied in full and discharged,
and each of the Holders no longer owns any Equity Interest, the Company
covenants and agrees with the Holders
21
to do all of the following (unless otherwise waived in writing in a specific
instance by the Holders of at least eighty percent (80%) in interest of the
outstanding principal amount of the Debentures, which waiver shall never be
construed as a waiver or release of the Company's future obligations to comply
with all terms and conditions of this Article 4):
4.1 Monthly Financials. The Company shall furnish to Holders within twenty
(20) days after the end of each month, a balance sheet of the Company as of the
end of each such monthly period, and a statement of income and a statement of
cash flows of the Company for such period and for the current fiscal year to
date, prepared in accordance with GAAP. Statements shall include year-to-date
figures compared to the Company's operating plan and budget, with variances
delineated. A brief summary shall be prepared by the Chief Executive Officer and
attached to such monthly report that summarizes performance highlights,
lowlights, variances from budget, and an outlook on the ensuing period.
Notwithstanding the foregoing, the Company's monthly financials from the Closing
through December 31, 2001 shall be prepared as indicated in this Section 4.1
above, and shall be prepared either in accordance with GAAP or prepared in a
manner acceptable to the Holders, in their sole discretion.
4.2 Quarterly Financials. The Company shall furnish to Holders within
forty-five (45) days after the end of each quarter, a balance sheet of the
Company as of the end of each such fiscal quarter, and a statement of income and
a statement of cash flows of the Company for such period and for the current
fiscal year to date, all prepared in accordance with GAAP, with the exception
that no notes need be attached to such statements and year-end audit adjustments
may not have been made.
4.3 Certification of Non-Default. The Company shall provide to the Holders
in writing at the end of each calendar quarter following Closing an officer's
certificate, signed by the Company's chief executive officer or chief financial
officer, certifying that no Event of Default has occurred under this Agreement,
or if any such Event of Default exists, stating the nature of such Event of
Default.
4.4 Annual Audit. Within ninety (90) days after the end of each fiscal
year, the Company shall furnish to Holders a balance sheet of the Company, as at
the end of such fiscal year, and a statement of income and a statement of cash
flows of the Company, for such year, all prepared in accordance with GAAP and
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail. This reporting obligation shall include
any annual "management letter" submitted by independent public accountants of
national standing (i.e., employed by a "Big Five" accounting firm) selected by
the Company's board of directors.
4.5 Projected Financials. The Company shall furnish to Holders at least
sixty (60) days prior to the beginning of each fiscal year an annual operating
plan and budget, prepared on a monthly basis for the ensuing fiscal year, and on
a basis consistent with prior periods (including, among other items, appropriate
reserves, accruals and provisions for income taxes) and representing the best
estimate of the Company based upon available information. The Company shall also
furnish to Holders projections for the next three (3) fiscal years in the same
format as the financial statements required pursuant to Section 4.1 above. The
Company shall also furnish to Holders, within a reasonable time of its
preparation, amendments to the annual
22
budget, if any. Such budget shall include underlying assumptions and a brief
qualitative description of the Company's plan by the Chief Executive Officer in
support of that budget.
4.6 Notice of Filings. Within thirty (30) days of filing, the Company
shall provide the Holders with copies of all returns and material documents
filed by the Company with any Governmental Authority, including, without
limitation, the U.S. Internal Revenue Service, the U.S. Environmental Protection
Agency, the U.S. Occupational Safety & Health Administration, the SBA, and the
SEC.
4.7 Notice of Litigation, Etc. The Company shall notify the Holders of (a)
any event (including pending or threatened litigation, material loan or lease
default, or the filing of any material lawsuit) which could cause a Material
Adverse Change; (b) any change in any material fact or circumstance represented
or warranted in this Agreement; and (c) a default or any event or occurrence
which with the lapse of time or notice or both could become an Event of Default
under this Agreement, by mailing to the Holders, by U.S. registered mail, either
(as applicable) (x) a copy of the complaint (or other such pleadings, filings or
notice served on or by the Company) within thirty (30) days of receipt thereof,
or (y) a letter setting out the facts known about the matter within thirty (30)
days after learning of such matter. As to any such suit or other proceedings to
which the Company is not a party but which could substantially affect the
Collateral or the operation of the Company's business, the Company shall notify
the Holders by mailing to the Holders, by U.S. registered mail, a copy of all
pleadings or filings obtained by the Company in regard thereto such litigation,
or if no pleadings or filings are obtained, a letter setting out the facts known
about the matter within thirty (30) days of receipt thereof. The Company shall
notify the Holders promptly if the Company becomes aware of any Hazardous
Material or other environmental problem with respect to the Real Property, or
any lien, action or notice resulting from the violation of any applicable
Environmental Law on or connected to the Real Property.
4.8 Notice of Defaults or Judgments. The Company shall give the Holders
notice of any default declared with respect to the Senior Debt, any Lease,
Contract or other material obligation of the Company, or any judgment entered
against the Company, by mailing an accurate and complete copy thereof to the
Holders within ten (10) days of receipt thereof by the Company.
4.9 Insurance. The Company shall maintain, in full force and effect and in
such reasonable amounts and forms as acceptable to the Holders, all-risk hazard
insurance on the Collateral and the Company's other assets, with a lender loss
payee and/or mortgagee clause in favor of the Holders, Federal flood insurance
if any such assets are in a designated flood plain, and commercial general
liability coverage, as well as such other appropriate insurance coverage as may
reasonably be determined by the Company in conjunction with the Holders.
4.10 Use of Proceeds. The Company shall use the net proceeds of the
Investment solely for (a) hiring personnel, (b) research and development, (c)
capital expenditures, (d) sales and marketing, (e) working capital, and (f)
acquisitions approved by the Company's board of directors. The Company hereby
authorizes the Holders and their designated representatives to conduct a review
of the Company's books and records sufficient to satisfy the Holders, in the
exercise of the Holders' reasonable discretion, that the proceeds of the
Investment were used for
23
the purposes permitted by the terms of this section and no other purpose or
purposes; provided that the Holders may exercise such right to review the
Company's books and records only once every calendar quarter.
4.11 Payments and Obligations to the Holders. The Company shall make all
payments of principal, interest and other charges as and when due under the
Debentures, shall timely make all payments of any other monetary Obligations,
shall perform or comply with, as the case may be, all of the other Obligations,
and shall perform and comply in all respects with all applicable terms,
conditions and covenants of this Agreement and the other Investment Documents.
4.12 Other Debts; Taxes. The Company shall promptly make all payments of
principal and interest as and when due under the Senior Debt and any other debt
obligations of the Company; provided, however, that this covenant shall not be
construed as permitting the making of any payments on account of any other debt
obligations of the Company that are not otherwise permitted by the terms and
conditions of this Agreement. The Company shall pay and discharge, and shall
cause each of the Company's Wholly-Owned Subsidiaries to pay and discharge, all
material taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profits, or upon any properties belonging to it, prior to
the date on which material penalties attach thereto, and all lawful claims
which, if unpaid, might become a lien or charge upon any properties of the
Company or any of the Company's Wholly-Owned Subsidiaries or cause a failure or
forfeiture of title thereto; provided, however, that neither the Company nor any
of its Wholly-Owned Subsidiaries shall be required to pay any such tax,
assessment, charge, levy or claim that is being contested in good faith and by
proper proceedings timely instituted and diligently conducted if it has
maintained adequate reserves with respect thereto in accordance with GAAP.
4.13 Information Requests. The Company shall furnish from time to time to
the Holder all information such Holder may reasonably request to enable such
Holder to prepare and file any form required of such Holder by the SEC, the SBA
or any other Governmental Authority.
4.14 Credit Checks; Access to Records. The Company shall permit a
designated authorized representative of the Holder and its attorney(s) and
accountant(s) to obtain credit and other background information on the Company,
and to inspect and examine the books of account and records of the Company at
reasonable times during normal business hours; provided that the Holders may
exercise such right to inspect and examine the Company's books and records only
once every calendar quarter. The Company shall allow any Holder or its agent(s)
to interview the Company's outside accounting firm and shall instruct them to
cooperate with the Holders in connection with such interview.
4.15 Maintain Copies; Financing Statements. The Company shall maintain an
original or a true copy of this Agreement and any modifications hereof, which
shall be available for inspection as called for herein or in the Debentures. The
Company agrees that a photographic or other reproduction of this Agreement or of
a financing statement is sufficient as a financing statement.
24
4.16 Maintain Existence. The Company shall take or cause to be taken all
steps and perform or cause to be performed all actions necessary or appropriate
to preserve and keep in full force and effect its existence as a corporation and
its right to conduct its business in a prudent and lawful manner in all
jurisdictions in which it currently conducts business, except where failure to
do so would not reasonably be expected to result in a Material Adverse Change.
4.17 Protect the Collateral. The Company shall take or cause to be taken
all steps and perform or cause to be performed all actions necessary or
appropriate to administer, supervise, preserve and protect the Collateral and to
maintain the Holders' perfected security interest in the Collateral, subject to
the rights of the secured parties relating to the Senior Debt.
4.18 Common Stock Reserves. The Company shall maintain such shares of
Common Stock as authorized but unissued, as may be necessary to permit the
Holders of the Warrants, Additional Warrants (if applicable) and Redemption
Warrants (if applicable), to acquire all of the Warrant Shares, Additional
Warrant Shares (if applicable) and Redemption Warrant Shares (if applicable) at
any time in accordance with the terms of the Warrants, Additional Warrants (if
applicable) and Redemption Warrants (if applicable).
4.19 Replacement of Warrants. The Company shall perform all acts required
under the Warrants, the Additional Warrants (if applicable) and Redemption
Warrants (if applicable), including the re-issuance or replacement of the
Warrants, Additional Warrants (if applicable) and Redemption Warrants (if
applicable) to any of the Holders upon a permitted transfer or exchange, loss or
destruction thereof.
4.20 Intellectual Property. If the Company files with the United States
Patent and Trademark Office any applications or other documents relating to the
Company's Intellectual Property, then the Company shall within fifteen (15) days
thereof notify the Holders in writing of any such action, and, upon the request
of the Holders, the Company shall execute and file such collateral assignments
and related documents in favor of the Holders, and otherwise cooperate with the
Holders, to provide the Holders a valid and perfected priority security interest
in and to all of the Company's Intellectual Property, subject to the rights of
the secured parties relating to the Senior Debt.
4.21 Board Meetings and Observation Rights. Until the earlier of (a) the
time the Debentures are repaid in full and each of the other monetary
Obligations has been satisfied in full and discharged or (b) prior to the
closing of the Company's initial public offering of its Common Stock, the
Company shall hold meetings of its board of directors (in person or by
teleconference) at least once every other month. Each of the Holders shall be
notified in writing of the date and time for each board meeting in accordance
with the Company's bylaws, and shall receive all reports and other board
materials which are provided to the board members. Each of Spring Capital and
Argosy shall have the right to have one (1) representative designated by Spring
Capital and Argosy, respectively, attend the Company's board meetings at the
Company's expense.
4.22 Key Man Insurance. Beginning thirty (30) days after the Closing, the
Company shall maintain in full force and effect term life insurance policies
insuring the respective lives of ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇, each in the
aggregate original amount of Two Million
25
Dollars ($2,000,000), with the consent of the insurance company and the
beneficiaries, as necessary, which assignment shall be substantially in the form
attached hereto as Exhibit 2.2(d). The proceeds of such term life insurance
policies shall first be used to search for, hire and compensate a replacement
mutually agreeable to the Holders and the Company, and then shall be payable to
Holders, first to satisfy accrued and unpaid interest due and owing under the
Debentures, and then to satisfy outstanding principal due and owing under the
Debentures.
4.23 Director and Officer Liability Insurance. Subject to the approval of
the Company's board of directors, the Company shall maintain in full force and
effect director and officer liability insurance in an amount of not less than
$2,000,000.
4.24 Financial Ratios and Covenants. Beginning with the calendar quarter
ending December 31, 2001, the Company shall, with respect to such calendar
quarter and each calendar quarter thereafter and for each fiscal year, as
applicable, comply with and maintain each of the financial ratios and covenants
set forth on Exhibit 4.24, measured in accordance with GAAP, based upon results
for the immediately preceding calendar quarter using the information set forth
in the financial statements provided by the Company pursuant to this Article 4.
4.25 Other Post-Closing Affirmative Covenants.
(a) Other Lenders. In the event any other lender shall require the
Company to obtain landlord waivers relating to such lender's collateral located
on the leased premises of the Company, then the Company shall be required to
deliver to the Holders similar landlord waivers relating to the Collateral
located on the subject leased premises;
(b) Financial Statements. The Company shall use its commercially
reasonable best efforts to deliver to the Holders not later than September 30,
2001, a balance sheet of the Company as of December 31, 2000, and a statement of
income and a statement of cash flows of the Company for the year ended December
31, 2000, all prepared in accordance with GAAP (or prepared in a manner
acceptable to the Holders in their sole discretion). Such financial statements
shall be accompanied by a report and opinion thereon by independent public
accountants of national standing (i.e., employed by a "Big Five" accounting
firm) selected by the Company's board of directors, and shall not be materially
different than the draft financial statements previously provided to the Holders
by the Company;
(c) Additional Warrants. To the extent applicable, the Company shall
issue to Holders the Additional Warrants pursuant to the terms of Section
4.25(i) below and the Redemption Warrants pursuant to the terms of Section
10.2(b) below;
(d) Capitalization Table after Closing of Series D Financing. Within
five (5) business days after the final closing of the Company's Series D
Preferred Stock financing, the Company shall provide the Holders with a fully
complete, current and accurate capitalization table illustrating the Company's
Fully Diluted Capital Stock, substantially in the form of Exhibit 3.21 attached
hereto. Such capitalization table shall be accompanied by a written
certification of the Company, signed by the Company's Chief Executive Officer or
Chief Financial Officer, certifying that such capitalization table is fully
complete, current and accurate as of the date of the final closing of the
Company's Series D Preferred Stock financing;
26
(e) Warrant Certificates after Closing of Series D Financing. Within
five (5) business days after the final closing of the Company's Series D
Preferred Stock financing, the Company shall provide the Holders with a written
certification of the Company, signed by the Company's Chief Executive Officer or
Chief Financial Officer, certifying the number of Warrant Shares for which each
Holder's respective Warrant is then exercisable;
(f) Dissolution of Sterling Communications, Inc. On or before October
15, 2001, the Company shall have dissolved Sterling Communications, Inc., a
Maryland corporation, and the Company shall have delivered to the Holders a
certificate from the Maryland Department of Assessments and Taxation
representing the fact of such dissolution;
(g) Key Man Life Insurance. Within thirty (30) days after the Closing,
the Company (i) shall have obtained the term life insurance policies on ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇ described in Section 4.22 above, and (ii) shall have
delivered to the Holders fully executed copies of the Collateral Assignment of
Life Insurance for each policy, substantially in the form attached hereto as
Exhibit 2.2(d);
(h) Landlord Waivers. Within sixty (60) days after the Closing, the
Company shall have delivered to the Holders fully executed copies of the
Landlord Waivers, substantially in the form attached hereto as Exhibit 2.2(c);
and
(i) Additional Warrants. If at any time after the Closing the Company
issues to any holders of its Series D Convertible Preferred Stock any Shortfall
Warrants (as defined in Section 1.4(c) of the Purchase Agreement), the Company
shall simultaneously issue to each of Spring Capital and Argosy the Additional
Warrants (as defined in Exhibit 4.25(i)) on the terms described in Exhibit
4.25(i).
ARTICLE 5
NEGATIVE COVENANTS
Until all of the Obligations have been satisfied in full and discharged,
the Company covenants and agrees with the Holders not to do any of the
following, without the prior written consent of the Holders of at least eighty
percent (80%) in interest of the outstanding principal amount of the Debentures
(which consent shall never be construed as a waiver or release of the Company's
future obligations to comply with all terms and conditions of this Article 5 and
which consent may be withheld by the Holders in the Holders' discretion for any
reason whatsoever):
5.1 Change of Capital Structure. The Company shall not (a) reclassify,
repurchase or redeem any capital stock, stock options, stock purchase warrants,
or convertible securities of the Company, except as contemplated by the terms of
this Agreement; (b) consummate a Transfer of the Company's Business; (c)
establish any Affiliates of the Company or make any investment in any other
Persons (whether or not an Affiliate of the Company); or (d) recapitalize the
Company or consummate a stock split or reverse stock split with respect to the
Common Stock. Notwithstanding the foregoing, in the event that the Company does
not obtain the necessary consent of the Holders to consummate any change of
capital structure event described
27
in this Section 5.1, then the Company may consummate such change of capital
structure event without the consent of the Holders only simultaneously with or
after: (x) the Company prepays the Holders in full an amount equal to all
outstanding principal and interest due under the Debentures and any other
outstanding monetary Obligations, and (y) the Company pays the Holders fifty
percent (50%) of any applicable Prepayment Premium (as defined in the
Debentures), that would otherwise be owed to the Holders as a result of such
Prepayment, as further described in the Debentures.
5.2 No Adverse Provisions. The Company shall not amend or rescind any of
the Company Constituent Documents or take any other actions that would breach
any of the affirmative or negative covenants contained in this Agreement or any
other Investment Document, which in either case would materially and adversely
affect any of the Holders or any of the rights of the Holders under this
Agreement or any of the other Investment Documents.
5.3 Distributions. The Company shall not make or cause to be made any
distribution of cash, capital stock or other property of the Company to any of
its stockholders, except for stock dividends that are made pro rata to all
holders of Common Stock, whether such distribution would be characterized as a
dividend or otherwise.
5.4 Dissipation of Assets. The Company shall not in any manner convey or
dispose of any equitable, beneficial or legal interest in any of the Collateral
or any of the Company's other material assets (if any), except for Inventory
sold and Equipment disposed of in the ordinary course of business and a Transfer
of the Company's Business (which shall be subject to the terms of this
Agreement) (each, an "Asset Disposition"). Notwithstanding the foregoing, in the
event that the Company does not obtain the necessary consent of the Holders to
consummate any Asset Disposition described in this Section 5.4, then the Company
may consummate such Asset Disposition without the consent of the Holders only
simultaneously with or after: (x) the Company prepays the Holders in full an
amount equal to all outstanding principal and interest due under the Debentures
and any other outstanding monetary Obligations, and (y) the Company pays the
Holders fifty percent (50%) of any applicable Prepayment Premium (as defined in
the Debentures) that would otherwise be owed to the Holders as a result of such
Prepayment, as further described in the Debentures.
5.5 No Encumbrances. The Company shall not permit to exist against any of
the Collateral or any of its other material assets (if any) any lien, mortgage,
pledge, security interest, title retention device, or other encumbrance junior
or senior to the liens and security interests of the Holders under the Security
Documents, except for the Permitted Encumbrances, purchase money security
interests and liens and security interests arising in the ordinary course of
business.
5.6 Prepayments. Except for the monetary Obligations and any prepayment of
the Senior Debt, the Company shall not prepay any debt or other liability.
5.7 Inside Transactions. The Company shall not purchase or sell any
property or services, nor borrow or lend money or property from or to, or
co-invest in, any transaction with any other officer, director, stockholder,
employee or Affiliate of the Company, except for reasonable and customary
employment compensation arrangements.
28
5.8 Change of Business, Etc. The Company shall not change the nature or
location (except for relocation of the Company's principal business office
within a 50 mile radius of the current location) of its business operations, or
expend or invest any funds in any manner not reasonably related to the Company's
Business.
5.9 Judgments. The Company shall not permit any judgment, or any series of
judgments, obtained against the Company aggregating in excess of two hundred
fifty thousand dollars ($250,000) to remain unpaid for over thirty (30) days
without obtaining a stay of execution or appropriate surety bond.
5.10 Additional Debts and Liabilities. The Company shall not incur any
additional indebtedness, or purchase any additional life insurance from business
income or assets (except for additional life insurance policies which are no
greater than Two Million Dollars ($2,000,000) per employee and which are
purchased at market rates), or create or incur any contingent liability
(including guaranties or endorsements) other than: (a) the monetary Obligations;
(b) trade payables or other short-term working capital debt incurred in the
normal and ordinary course of the Company's business; (c) depositing checks and
other instruments for the payment of money acquired in the ordinary course of
business; (d) the Leases and other lease and purchase money obligations entered
into in the ordinary course of the Company's business; (e) indebtedness between
and among the Company and any Affiliates of the Company (but only so long as
such indebtedness is held by the Company or such Affiliates of the Company); (f)
the Senior Debt; (g) employee benefit packages for employees of the Company; and
(h) that other indebtedness acknowledged by the Holder and set forth on Exhibit
5.10 hereto. The Company shall use reasonable efforts to cause all new leases
and debt agreements entered into by the Company to include a covenant or other
suitable provision permitting a Holder to cure any monetary default by the
Company thereunder; this requirement shall not, however, be deemed to be or
construed as imposing any duty upon any of the Holders to cure any such defaults
or any rights of any third parties with respect to any such defaults; and
furthermore, the Company's failure to meet this requirement (set forth in this
last sentence of Section 5.10) shall never constitute an Event of Default under
this Agreement.
5.11 Major Expenditures. The Company shall not make cash expenditures for
capital improvements or otherwise in the fiscal year in which this Agreement is
executed and delivered by the parties hereto in excess of Three Hundred and
Fifty Thousand Dollars ($350,000), or in any subsequent fiscal year in excess of
Three Hundred and Fifty Thousand Dollars ($350,000), unless and to the extent
such expenditures are included in an annual budget approved by the Company's
board of directors or are approved by the Holders (which approval shall not be
unreasonably withheld). The Company shall not consummate any acquisition
requiring cash expenditures and/or debt financings in excess of Five Million
Dollars ($5,000,000) in the aggregate, unless and to the extent such acquisition
is approved by the Holders (which approval shall not be unreasonably withheld).
5.12 No Adverse Actions. The Company shall not, by amendment to the Company
Constituent Documents or through any reorganization, reclassification,
consolidation, merger, sale of assets, Act of Dissolution, issuance or Transfer
of securities or any other action, avoid or seek to avoid the observance or
performance of any of the terms, covenants and conditions of this Agreement or
any of the other Investment Documents, but shall at all times carry out in good
29
faith all such terms and take all such actions as may be necessary or
appropriate to protect the rights of the Holders hereunder and under each of the
Investment Documents.
ARTICLE 6
FEES, EXPENSES AND INDEMNIFICATION
6.1 Fees and Expenses of the Holders. At the Closing, the Company
shall pay: (a) a commitment fee to Spring Capital of Forty Five Thousand Dollars
($45,000), (b) a commitment fee to Argosy of Fifteen Thousand Dollars ($15,000),
and (c) all out-of-pocket costs and expenses incurred by Spring Capital and
Argosy in connection with the Investment, including, without limitation, all
reasonable fees and disbursements for work done for Spring Capital by its
attorneys and legal staff, such legal fees not to exceed thirty thousand dollars
($30,000) (which amount may be increased by Spring Capital subject to the
Company's approval, which approval shall not be unreasonably withheld). All
amounts described in this section shall be due and payable in full by the
Company at the Closing. Spring Capital acknowledges receipt of a deposit of
Twenty Five Thousand Dollars ($25,000) from the Company, which will be applied
at Closing to Spring Capital's expenses described in Section 6.1(c). Any unused
portion of such deposit may be applied to the fee described in Section 6.1(a).
6.2 Other Fees and Expenses. The Company shall pay, as and when due,
all of the following fees and expenses: (a) the fees and expenses of its own
counsel; (b) any registration or qualification costs required in connection with
the issuance of the Debentures, the Warrants, the Additional Warrants (if
applicable), the Redemption Warrants (if applicable), or otherwise required
pursuant to the terms of this Agreement; (c) any recordation, transfer,
documentary or other taxes or costs of, or incidental to, any recording or
filing of any of the Security Documents (including any financing statements)
concerning the Collateral; and (d) any income, excise, franchise or other taxes
of the Company incident to the transactions described herein.
6.3 Indemnification. In addition to the indemnification provisions
contained elsewhere herein and in the other Investment Documents, the Company
agrees to indemnify, defend and hold harmless each of the Holders and each of
their respective officers, directors, partners, employees, agents and
controlling persons (collectively, the "Indemnified Parties") from and against
any and all losses, claims, damages, liabilities, demands, liens, penalties and
related expenses, including reasonable attorneys' fees and expenses, incurred by
or asserted against any of the Indemnified Parties (whether prior to or after
transfer of the Real Property pursuant to foreclosure or by deed in lieu
thereof) arising out of, in any way in connection with, or as a result of: (a)
this Agreement and the other Investment Documents, (b) the occurrence of any
Event of Default hereunder or any event that would constitute an Event of
Default but for the giving of notice and/or passage of time; (c) any federal,
state or local transfer or recording taxes or filing fees which may become
payable in connection with this transaction; (d) the spilling, leaking, pumping,
pouring, unsettling, discharging, leaching, releasing or clean up of any
Hazardous Materials by any Person or entity on any of the Real Property or any
other property owned by the Company, whether such act or failure to act results,
directly or indirectly, to the Real Property or any other property becoming
contaminated with Hazardous Materials, (e) the discovery and/or clean up of
Hazardous Materials which were deposited on or were existing on the Real
Property prior to a transfer to the Holders or any other purchaser in a
foreclosure or
30
otherwise pursuant to the exercise of the Holder's remedies; (f) any violations
by any party other than the Holders, the Holders' agents and assigns, of any
other Environmental Law, regulation or ordinance with regard to the Real
Property or any other property owned by the Company; or (g) any claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether or not any of the Indemnified Parties is a party thereto; provided,
however, any such indemnity shall not apply to any such losses, claims, damages,
liabilities or related expenses arising from the gross negligence or willful
misconduct of any of the Holders. In addition, the Company agrees to make such
provisions as are reasonably requested by any of the Indemnified Parties for
contribution to any such party in the event that the Company's indemnification
obligations hereunder are unavailable for any reason.
6.4 Survival; Timing of Payments. Notwithstanding any other provision
hereof, the provisions of this Article 6 and any other indemnification
provisions contained in this Agreement and the other Investment Documents shall
survive and remain operative and in full force and effect regardless of the
termination of this Agreement or expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of the
Debentures and satisfaction and discharge of the other monetary Obligations, the
invalidity or unenforceability of any term or provision of this Agreement, the
Debentures or any Security Documents, or any investigation made by or on behalf
of any of the Holders. Except as provided to the contrary, all amounts due under
this Article 6 shall be payable upon written demand therefor.
6.5 Third Party Claim Procedures. In the event that any claim or
demand is asserted by a third party against any of the Holders (a "Third Party
Claim"), which could result in the Company being liable to any Holder, such
Holder will send a Claim Notice to the Company within ten (10) days of the
Holder receiving notice of the Third Party Claim. In the event that the Holder
fails to notify the Company of such Third Party Claim within said ten (10) day
notice period, the Company shall not be relieved from any liability it may have
to that Holder with respect thereto, unless the Company is damaged or materially
prejudiced from adequately defending such Third Party Claim. In the event the
Company notifies the Holder within thirty (30) days after the Holder has given
notice of the matter that the Company is assuming the defense thereof, (A) the
Company will defend the Holder against the matter with counsel of its choice
reasonably acceptable to the Holder at the cost and expense of the Company, (B)
the Holder may retain separate co-counsel at its sole cost and expense, (C) the
Holder will not consent to the entry of any judgment or enter into any
settlement or compromise with respect to the matter without first consulting
with the Company, and (D) the Company will not consent to the entry of any
judgment with respect to the matter, or enter into any settlement or compromise
which does not include a provision whereby the plaintiff or claimant in the
matter releases the Holder from all liability with respect thereto, without the
written consent of the Holders (not to be withheld unreasonably). In the event
the Company does not notify in writing the Holder within thirty (30) days after
the Holder has given notice of the matter that the Company is assuming the
defense thereof, however, the Holder may defend against, or enter into any
settlement with respect to, the matter in any manner it reasonably may deem
appropriate.
31
ARTICLE 7
DEFAULT PROVISIONS
The occurrence of any of the events specified below in this Article 7
(any such, an "Event of Default") shall constitute an immediate breach of, and
default under this Agreement, entitling the Holders to exercise all of the
rights and remedies specified in this Agreement, in the Security Documents, in
any other Investment Document, and under all Applicable Laws, without the
obligation to furnish any further notice or opportunity to cure (beyond that
specified in the applicable sections of this Article 7), all of which are hereby
expressly waived by the Company:
7.1 Monetary Defaults. Any installment payment of principal, interest
or other charge under the Debentures, or any other monetary Obligation, is not
received by Holders on or before the fifth (5th) business day after the due date
thereof;
7.2 Other Breaches. The Company or any other Investment Party shall
fail to comply with their respective affirmative or negative covenants,
agreements and undertakings in this Agreement, the Debentures or any of the
Security Documents, and such failure shall continue for a period of twenty (20)
calendar days from the date of the delivery of written notice thereof from any
Holder;
7.3 Misrepresentation. Any representation or warranty made by the
Company in this Agreement, in any of the Security Documents, any of the other
Investment Documents, or in any other writing supplied to the Holders by the
Company or on the Company's behalf shall be untrue in any material respect when
made;
7.4 Loss of Key Employee. If and when ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ is no longer
employed by the Company (except by death or substantial disability) or does not
give his full time and attention to the business of the Company; provided,
however, that the occurrence of any of the events described in this section
shall not constitute a default or an Event of Default unless the Company shall
not have been able to locate a suitable replacement employee, reasonably
acceptable to the Holders, within ninety (90) days after the date that the
event(s) described above occurred; and provided, further, that the Holders
hereby acknowledge that ▇▇▇▇▇▇▇ ▇▇▇▇▇ is a suitable replacement employee for
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ in the position of Chief Executive Officer in the event that
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ is no longer employed by the Company or fails to give his full
time and attention to the business of the Company.
7.5 Act of Bankruptcy or Dissolution; ERISA. Any Act of Bankruptcy or
Act of Dissolution, or any material violation of the Company's obligations under
ERISA (which ERISA obligations are not cured within thirty (30) calendar days of
notice thereof), shall have occurred with respect to the Company or any other
Investment Party;
7.6 Final Judgments. A final judgment, or any series of judgments,
obtained against the Company aggregating in excess of twenty hundred fifty
thousand dollars ($250,000) is not satisfied or stayed within sixty (60) days
after entry;
7.7 Other Investment Document Defaults. The Company or any other
Investment Party shall be in default in any material respect under any of the
other Investment Documents
32
(after taking into account the giving of any notice and the expiration of the
applicable cure period (if any) required pursuant to the applicable terms of
such other Investment Document or Investment Documents); or
7.8 Other Defaults Generally. (a) Any default shall have been declared
under the Senior Debt (after giving effect to any applicable notice and/or grace
periods) and written notice of such default shall have been delivered to the
Holders pursuant to Section 4.8 above, (b) any default shall have been declared
under either of the Largo, Maryland or Washington, D.C. Leases (or successor
Leases thereto), which default would reasonably be expected to cause a Material
Adverse Change, or (c) any default shall have been declared under any Contract
or other material indebtedness or material obligation of the Company, which
default would reasonably be expected to cause a Material Adverse Change.
ARTICLE 8
CERTAIN REMEDIES
Upon the occurrence of an Event of Default under this Agreement, each
of the Holders shall be entitled to exercise any or all of the rights and
remedies set forth below, in addition to such other rights and remedies as may
be provided for in the other Investment Documents or as may be available at law
or in equity.
8.1 Acceleration. Following the occurrence of an Event of Default,
each of the Holders may, at their option, accelerate the maturity of the
Debentures and all other monetary Obligations and demand immediate payment in
full of all amounts payable under the Debentures and all of the monetary
Obligations, without presentment, demand, protest, or further notice by any of
the Holders to the Company, all of which are hereby expressly waived by the
Company.
8.2 Post Default Interest. Following the occurrence and continuation
of an Event of Default, the Holders shall be paid interest on the Debentures, as
set forth in the Debentures.
8.3 Sale of Collateral, Etc. Following the occurrence of an Event of
Default, any of the Holders may sell, assign, and deliver the whole or any part
of the Collateral, as more fully described in the Security Agreement. Following
the occurrence of an Event of Default, any of the Holders are empowered to
collect or cause to be collected or otherwise to be converted into money all or
any part of the Collateral, by suit or otherwise, and to surrender, compromise,
release, renew, extend, exchange or substitute any item of the Collateral in
transactions with the Company or any third party, irrespective of any assignment
thereof by the Company, and without prior notice to or consent of the Company or
any assignee.
8.4 Costs. The Company shall pay all expenses of any nature, whether
incurred in or out of court, and whether incurred before or after the Debentures
shall become due at their maturity date or otherwise (including, but not limited
to, reasonable attorneys' fees and costs) which the Holders may deem necessary
or proper in connection with the collection of any of the monetary Obligations
or the administration, supervision, preservation, protection of (including, but
not limited to, the maintenance of adequate insurance) or the realization upon,
any of the Collateral. The Holders are authorized to pay at any time and from
time to time any or all of
33
such expenses, to add the amount of such payment to the amount of principal
outstanding under the Debentures, and to charge interest thereon at the rate
specified in the Debentures.
8.5 Remedies Non-Exclusive. None of the rights, remedies, privileges
or powers of the Holders expressly provided for herein shall be exclusive, but
each of them shall be cumulative with, and in addition to, every other right,
remedy, privilege and power now or hereafter existing in favor of the Holders,
whether pursuant to the other Investment Documents, at law or in equity, by
statute or otherwise.
ARTICLE 9
(INTENTIONALLY OMITTED)
ARTICLE 10
RIGHTS OF HOLDERS
10.1 Personal Gain upon Transfer of the Company's Business. In the
event of a Transfer of the Company's Business, then any emoluments or profits
relating thereto and flowing to any other officer, director or stockholder of
the Company, otherwise than through direct payment for such person's equity
ownership in the Company or through dividends or return of capital paid in
respect thereof, shall be added to the direct consideration for the Transfer of
the Company's Business in calculating the total purchase price for purposes of
determining any share thereof which the Holders may be entitled to receive with
respect to their equity interest in the Company. Such emoluments or profits
shall include, without limitation, any non-competition agreements or similar
arrangements and any salaries or consulting fees in excess of then current
compensation paid, or the fair market value of the services for which the
compensation is paid, whichever is greater, after such Transfer of the Company's
Business or any points or fees paid to induce such Transfer of the Company's
Business. Where such emoluments or profits are paid in kind they will be valued
at the higher of cost or fair market value for purposes of this calculation.
10.2 Redemption Rights.
(a) Right; Price. At any time after August 7, 2006, or at any
time after a Mandatory Prepayment Event, each Holder may, by written demand,
require the Company to purchase, in whole or in part, the Warrants (or Common
Stock issuable upon exercise of the Warrants), and/or the Additional Warrants
(or Common Stock issuable upon exercise of the Additional Warrants) (if
applicable), for a price per share of the Common Stock issued or issuable upon
the exercise thereof (less the exercise price therefor, if applicable), equal to
the Warrant Redemption Price (each such demand, a "Redemption Demand").
(b) Exercise of Right. To exercise any Redemption Demand, each
Holder shall deliver written notice of its intention to do so indicating the
number of shares of Common Stock (represented by the Holder's respective Warrant
and/or Additional Warrant, as applicable) to be included in such redemption. The
closing of the redemption transaction shall take place on or before the
thirtieth (30/th/) day following the determination of the Warrant Redemption
Price.
34
The Company shall pay the Warrant Redemption Price in immediately available
funds. If the Company does not have sufficient funds legally available to redeem
the shares of Common Stock (represented by the Warrants and/or the Additional
Warrants, as applicable) required to be redeemed, then it shall redeem such
shares pro rata to the extent possible and shall redeem the remaining shares to
be redeemed as soon as sufficient funds are legally available. Notwithstanding
the foregoing, in the event the Company does not have sufficient funds legally
available to redeem all shares of Common Stock represented by any Redemption
Demand, then the Company shall issue to (i) Spring Capital (or its successors or
registered assigns) a warrant (a "Redemption Warrant") to purchase 1.5% of the
Fully Diluted Capital Stock of the Company at an exercise price of $0.01 per
Warrant Share, for each successive six month period (or portion thereof) that
the Company fails to redeem all shares of Common Stock represented by such
Holder's Redemption Demand, not to exceed twelve months in the aggregate (i.e.,
Spring Capital (or its successors or registered assigns) shall receive, at most,
a Redemption Warrant exercisable for three percent (3%) of the Company's Fully
Diluted Capital Stock); and (ii) Argosy (or its successors or registered
assigns) a warrant (a "Redemption Warrant") to purchase one-half of one percent
(0.5%) of the Fully Diluted Capital Stock of the Company at an exercise price of
$0.01 per Warrant Share, for each successive six month period (or portion
thereof) that the Company fails to redeem all shares of Common Stock represented
by such Holder's Redemption Demand, not to exceed twelve months in the aggregate
(i.e., Argosy (or its successors or registered assigns) shall receive, at most,
a Redemption Warrant exercisable for one percent (1%) of the Company's Fully
Diluted Capital Stock). Any Redemption Warrant (or "Redemption Warrants", when
used in the plural) issued pursuant to this Section 10.2 shall be issued
substantially in the forms of the Warrants attached as Exhibit 2.4(a)(i) and
Exhibit 2.4(a)(ii) hereto.
(c) Mechanics of Exercise. Each Holder exercising any Redemption
Demand hereunder shall surrender its respective Warrant and/or Additional
Warrant instrument (as the case may be) or stock certificate representing the
appropriate number of redeemed shares to the Company, and thereupon the
redemption price of such shares shall be payable to the order of the person
whose name appears on such respective Warrant and/or Additional Warrant
instrument or stock certificate as the owner thereof and each surrendered
Warrant or stock certificate shall be canceled. A new Warrant and/or Additional
Warrant instrument or stock certificate shall be issued to such Holder
representing unredeemed shares, as applicable.
(d) Termination of Rights. The rights granted under this Section
10.2 shall terminate upon the completion of an initial public offering of the
Company's Common Stock.
ARTICLE 11
REPRESENTATIONS, WARRANTIES AND COVENANTS OF spring capital
AND ARGOSY
Each of Spring Capital and Argosy hereby represents, warrants and covenants
to the Company (which representations, warranties and covenants shall survive
the execution and delivery of this Agreement and the funding of the Investment)
as set forth below.
35
11.1 Purchase Without View to Distribute. The Debentures and the Equity
Interest are being acquired by Spring Capital and Argosy for each entity's own
account, not as a nominee or agent, and not with a view to resale or
distribution within the meaning of the Securities Act, and the rules and
regulations thereunder.
11.2 Restrictions on Transfer. Spring Capital and Argosy each (a)
acknowledges that its respective Debenture and the Equity Interest are not
registered under the Securities Act and that its respective Debenture and the
Equity Interest to be acquired by it must be held indefinitely by it unless they
are subsequently registered under the Securities Act or an exemption from
registration is available, (b) is aware that Rule 144 is not presently available
for use by Spring Capital or Argosy for resale of its respective Debenture or
the Equity Interest, and (c) is aware that any routine sales of its respective
Debenture and the Equity Interest under Rule 144 of the Securities Act may be
made only in limited amounts and in accordance with the terms and conditions of
that Rule and that in such cases where the Rule is not applicable, compliance
with some other registration exemption will be required. Each of Spring Capital
and Argosy covenants that in no event will it dispose of either the Debentures
or the Equity Interest (other than in conjunction with an effective registration
statement under the Securities Act or in compliance with Rule 144 promulgated
under the Securities Act) unless and until (i) each of Spring Capital and
Argosy, as the case may be, shall have notified the Company of the proposed
disposition and shall have furnished the Company with a written statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, shall have furnished the Company with an opinion of
counsel reasonably satisfactory in form and substance to the Company to the
effect that (x) such disposition will not require registration under the
Securities Act, and (y) appropriate action necessary for compliance with the
Securities Act and any applicable state, local or foreign law has been taken. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144.
11.3 Access to Information. Each of Spring Capital and Argosy confirms
that the Company has made available to it the opportunity to ask questions of
and receive answers from the Company's officers and directors concerning the
terms and conditions of the offering and has received to its satisfaction, such
additional information, in addition to that set forth herein, about the business
and financial condition of the Company and the terms and conditions of the
Debentures and the Equity Interest as it has requested.
11.4 Additional Representations. Each of Spring Capital and Argosy
represents that (a) it is an "accredited investor" (as such term is defined in
Rule 501 promulgated under the Securities Act), (b) its financial situation is
such that it can afford to bear the economic risk of holding its respective
Debenture and the Equity Interest for an indefinite period of time and suffer
complete loss of its investment in the Debenture and the Equity Interest, and
(c) its knowledge and experience in financial and business matters are such that
it is capable of evaluating the merits and risks of its respective Debenture and
the Equity Interest.
11.5 Enforceability. This Agreement constitutes the legal, valid and
binding obligation of each of Spring Capital and Argosy, enforceable against
each of Spring Capital and Argosy in accordance with its terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' rights,
(b) as limited by general principles of equity that restrict the availability of
36
equitable remedies, and (c) to the extent that the enforceability of the
indemnification provisions of Section 2.9 of the Investor Rights Agreement of
even date herewith may be limited by applicable laws. The execution, delivery
and performance of this Agreement and the Investment Documents by Spring Capital
and Argosy does not and will not conflict with, violate or cause a breach of any
agreement, contract or instrument to which Spring Capital or Argosy,
respectively, is a party or any judgment, order or decree to which Spring
Capital or Argosy is subject.
11.6 Brokerage. 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 Spring Capital
or Argosy. Spring Capital and Argosy shall each pay, and hold the Company
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.
ARTICLE 12
MISCELLANEOUS
12.1 Non-Waiver. No course of dealing between a Holder and any other party
hereto or any failure or delay on the part of a Holder in exercising any rights
or remedies hereunder shall operate as a waiver of any rights or remedies of any
Holder under this or any other applicable instrument. No single or partial
exercise of any rights or remedies hereunder shall operate as a waiver or
preclude the exercise of any other rights or remedies hereunder.
12.2 Security Interest Not Impaired. The security interest of the Holders
and their assigns shall not be impaired by a Holder's sale, hypothecation or
re-hypothecation of a Debenture or any item of the Collateral, or by any
indulgence, including, but not limited to: any renewal, extension, or
modification which a Holder may grant with respect to the monetary Obligations
or any part thereof; any surrender, compromise, release, renewal, extension,
exchange, or substitution which a Holder may grant with respect to the
Collateral or any portion thereof; or any indulgence granted in respect of any
endorser, guarantor or surety. The purchaser, assignee, transferee or pledgee of
the Debentures, Collateral, any guaranty, or any other Investment Document (or
any of them), sold, assigned, transferred, pledged or repledged shall forthwith
become vested with, and entitled to exercise, all powers and rights given by
this Agreement to the Holders, as if said purchaser, assignee, transferee or
pledgee were originally named in this Agreement in place of the Holders.
12.3 Notices. All notices or communications under this Agreement or the
Debentures shall be mailed, postage prepaid, or delivered to the following
addresses (or to such other address as shall at any time be designated by any
party in writing to the other parties):
To the Holders: Spring Capital Partners, L.P.
The Latrobe Building, 5/th/ Floor
▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
37
Argosy Investment Partners II, L.P.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
With a copy to: ▇▇▇▇▇▇ Godward LLP
One Freedom Square, Reston Town Center
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esquire
To the Company: InPhonic, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
With a copy to: ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esquire
Rejection or other refusal to accept, or the inability to deliver because
of a changed address of which no notice was given, shall not affect the
effectiveness or the date of delivery for any notice sent in accordance with the
foregoing provisions. Each such notice, request or other communication shall be
deemed sufficiently given, served, sent and received for all purposes at such
time as it is delivered to the addressee (with the return receipt, the delivery
receipt, the affidavit of the messenger or the answer back being deemed
conclusive (but not exclusive) evidence of such delivery) or at such time as
delivery is refused by addressee upon presentation.
12.4 Binding Agreement; Survival. This Agreement shall bind and inure to
the benefit of Spring Capital, Argosy, and the Company, and except as otherwise
expressly provided to the contrary herein, each of their respective heirs,
successors and assigns. This Agreement and the rights of each Holder hereunder
shall survive the Closing in accordance with the terms of this Agreement.
12.5 Entire Agreement; Integration Clause. This Agreement, the Exhibits
hereto and the other Investment Documents set forth the entire agreements and
understandings of the parties hereto with respect to this transaction, and any
prior agreements are hereby merged herein and terminated.
12.6 No Oral Modification or Waivers. The terms herein may not be modified
or waived orally, but only by an instrument in writing signed by the party
against which enforcement of the modification or waiver (as the case may be) is
sought.
12.7 Relationship of the Parties; Advice of Counsel. This Agreement
provides for the making of an investment by Spring Capital and Argosy, in each
of their respective capacities as investors, to the Company, in its capacity as
a borrower, and for the payment of interest and
38
repayment of principal by the Company to each of Spring Capital and Argosy. The
provisions herein for compliance with financial covenants and delivery of
financial statements are intended solely for the benefit of Spring Capital and
Argosy to protect their interests as lenders in assuring payments of interest
and repayment of principal, and nothing contained in this Agreement shall be
construed as permitting or obligating Spring Capital or Argosy to act as
financial or business advisors or consultants to the Company, as permitting or
obligating Spring Capital or Argosy to control the Company or to conduct the
Company's operations, as creating any fiduciary obligation on the part of Spring
Capital or Argosy to the Company, or as creating any joint venture, agency or
other relationship between the parties other than as explicitly and specifically
stated in this Agreement. Neither of Spring Capital or Argosy is (and neither
shall be construed as) a partner, joint venturer, alter-ego, manager,
controlling person, operator or other business participant of any kind of the
Company; neither Spring Capital nor Argosy nor the Company intend that Spring
Capital or Argosy assumes such status, and, accordingly, neither Spring Capital
nor Argosy shall be deemed responsible for (or a participant in) any acts or
omissions of any of the Company or any of its partners. The Company represents
and warrants to Spring Capital and Argosy that it has had, or has had the
opportunity to seek, the advice of experienced counsel of its own choosing in
connection with the negotiation and execution of this Agreement and with respect
to all matters contained herein.
12.8 Controlling Law; Venue, etc.
(a) Controlling Law. This Agreement and each of the other Investment
Documents shall be governed by, and interpreted and construed in accordance
with, the internal laws of the State of Maryland (without regard to its
conflicts of law principles).
(b) Venue. Venue for the adjudication of any claim or dispute
arising out of this Agreement or any of the other Investment Documents shall be
proper only in the state or federal courts of the State of Maryland, and all
parties to this Agreement and the other Investment Documents hereby consent to
such venue and agree that it shall not be inconvenient and not subject to review
by any court other than such courts in Maryland.
(c) Personal Jurisdiction, etc. The Company intends and agrees that
the courts of the jurisdictions in which the Company is formed and in which the
Company conducts its business should afford full faith and credit to any
judgment rendered by a court of the State of Maryland against the Company under
this Agreement and the other Investment Documents, and the Company intends and
agrees that such courts should hold that the Maryland courts have jurisdiction
to enter a valid, in personam judgment against the Company.
(d) Personal Service. The Company, each other Investment Party and
the Holders agree that service of any summons and complaint, and other process
which may be served in any suit, action or other proceeding, may be made by
mailing via U.S. certified or registered mail or by hand-delivering a copy of
such process to the Company, such other Investment Party or the Holders (as
applicable) at its address specified above.
(e) Reliance. The Company and each other Investment Party all
expressly acknowledge and agree that the provisions of this section are
reasonable and made for the express benefit of each of the Holders.
39
12.9 Waiver of Trial by Jury. Each party to this Agreement agrees that
any suit, action or proceeding, whether claim, defense or counterclaim, brought
or instituted by any party hereto or any successor or assign of any party on or
with respect to this Agreement or any other Investment Document or which in any
way relates, directly or indirectly, to the Debentures or any event, transaction
or occurrence arising out of or in any way connected with this Agreement, the
other Investment Documents or the dealings of the parties with respect thereto,
shall be tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND
ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT IT MAKES THIS
WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION WITH, OR THE OPPORTUNITY TO
CONSULT WITH, COUNSEL OF ITS CHOICE.
12.10 Costs and Fees Related to Enforcement or a Successful Defense.
Without limiting the Holders' entitlements hereunder or under the terms of any
of the other Investment Documents, the Company and its successors and assigns
(each, a "Reimbursing Party"), hereby agree to reimburse the Holders for any and
all costs and fees, including reasonable attorneys' fees and expenses, incurred
by any of the Holders or their Affiliates in connection with: (a) any suit,
action, claim or other activity of the Holders to collect the monetary
Obligations or any portion thereof or to enforce any of the provisions of this
Agreement or any other Investment Document against such Reimbursing Party in
which such Reimbursing Party does not prevail with respect to substantially all
of its or his claim; and (b) any suit, action, claim or other liability asserted
against any of the Holders or their Affiliates by such Reimbursing Party in
which such Reimbursing Party does not prevail with respect to substantially all
of its or his claim.
12.11 Independent Covenant to Make Payments. The payment and
performance by the Company and any other Investment Party of all of the monetary
Obligations shall be absolute and unconditional, irrespective of any defense or
any rights of set-off, recoupment or counterclaim the Company or any other
Investment Party might otherwise have against any of the Holders, and the
Company and each other Investment Party shall pay and perform all of the
monetary Obligations (to the extent applicable to him or it), free of any
deductions and without abatement, diminution, recoupment, counterclaim or
set-off. Until payment in full of all of the monetary Obligations, the Company
shall: (a) not suspend or discontinue any payments required pursuant to the
Debentures, this Agreement or any other Investment Documents; and (b) perform
and observe all of the other terms and provisions of all of the Investment
Documents.
12.12 Headings. The headings of the paragraphs and sub-paragraphs of
this Agreement and the other Investment Documents are inserted for convenience
only and shall not be deemed to constitute a part of this Agreement or the other
Investment Documents.
12.13 Severability. To the extent any provision herein violates any
applicable law, that provision shall be considered void and the balance of this
Agreement shall remain unchanged and in full force and effect.
12.14 Agreement Between Holders.
40
(a) Lead Investor - Duties. The Holders hereby designate Spring
Capital as lead investor (the "Lead Investor") with power to make non-material
changes or non-material waivers hereunder on behalf of all of the Holders, but
only upon unanimous written consent of the Holders. All material changes or
waivers, including but not limited to any modification, waiver or other change
affecting this Agreement or any of the other Investment Documents, as the case
may be, shall be made only upon written approval of each of the Holders.
(b) Lead Investor - No Representation. Regardless of any other
provisions of this Section 12.14, neither the Lead Investor nor any other Holder
is acting on behalf of any other Holder or on behalf of the Company or any
Investment Party as agent, broker, dealer, affiliate or underwriter. The Lead
Investor makes no representation as to accuracy or completeness of any
information or warranty stated herein. The Lead Investor's investigations, if
any, have been for the sole purpose of making its own investment decision, and
no such investigation or decision may be relied on by another investor.
(c) Equal Rights Among Holders. Notwithstanding the appointment
of a Lead Investor, the right to receive payments under this Agreement, the
Debentures and the other documents contemplated herein, and the Equity Interest
provided herein and pursuant to the Warrants, the Additional Warrants and the
Redemption Warrants, as the case may be, shall be shared ratably among the
Holders according to their allocation of the amounts advanced under the
Debentures and the Equity Interest issuable under the Warrants, the Additional
Warrants and the Redemption Warrants, as the case may be. In this regard, any
Holder receiving a prepayment or other benefit disproportionate to its ratable
share therefor shall receive the same in trust for the other Holders and
immediately deliver the same to such other Holders.
12.15 Counterparts. This Agreement may be executed in as many
counterpart copies as may be required. It shall not be necessary that the
signature of, or on behalf of, each party appear on each counterpart, but it
shall be sufficient that the signature of, or on behalf of, each party appear on
one or more of the counterparts. All counterparts shall collectively constitute
a single agreement. It shall not be necessary in any proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties.
[SIGNATURE PAGE FOLLOWS]
41
In Witness Whereof, the undersigned have executed and delivered this
Investment Agreement as of the day and year first above written.
COMPANY:
InPhonic, Inc.,
a Delaware corporation
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
_______________________________________________
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇,
Chief Executive Officer
HOLDERS:
SPRING CAPITAL PARTNERS, L.P.
By: Spring Capital Investors, LLC
Its General Partner
By: /s/ ▇▇▇▇▇▇ McE. ▇▇▇▇▇▇▇
_______________________________________________
▇▇▇▇▇▇ McE. ▇▇▇▇▇▇▇,
Member
ARGOSY INVESTMENT PARTNERS II, L.P.,
a Pennsylvania limited partnership
By: Argosy Associates II, L.P., its general partner
By: Argosy Associates II, Inc., its general partner
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
______________________________________________
Name:______________________________________________
Vice President
[Signature Page to Investment Agreement]
List of Exhibits
Document Exhibit
Commercial Tort Claims 1.1
Spring Capital Debenture 2.1(a)
Argosy Debenture 2.1(b)
Security Agreement 2.2(a)
UCC-1 Financing Statements 2.2(b)
Landlord Waivers 2.2(c)
Collateral Assignment of Life Insurance 2.2(d)
Collateral Assignment of Intellectual Property 2.2(e)
Spring Capital Stock Purchase Warrant 2.4(a)(i)
Argosy Stock Purchase Warrant 2.4(a)(ii)
Investor Rights Agreement Amendment 2.7(c)(iii)
Co-Sale Agreement Amendment 2.7(c)(iv)
Opinion of the Company's Counsel 2.7(c)(v)
Company's Constituent Documents 3.1
Company's Qualifications to Do Business 3.2
Company's Resolutions 3.3
Litigation Schedule 3.5
Tax Returns 3.10
Audited Financials 3.11(a)
Interim Financials 3.11(b)
List of Material Leases 3.13
List of Material Contracts 3.14
Business Plan 3.15
Projections 3.16
List of Officers, Directors and Affiliates of the Company 3.19
Description of Ownership and Control of the Company 3.21
Material Change 3.22
List of Employee Benefit Plans 3.25
Collective Bargaining 3.26
List of Employment/Compensation Contracts 3.27
List of Insurance Policies and Binders 3.28
Licenses 3.29
Subsidiaries 3.30
Intellectual Property 3.31
SBA Form 480 3.32(a)
SBA Form 652 3.32(b)
SBA Form 1031 3.32(c)
SBA Economic Impact Assessment Form 3.32(d)
Financial Ratios and Covenants 4.24
Additional Warrants 4.25(i)
Other Indebtedness Acknowledged by Holders 5.10
Table of Contents
Page
ARTICLE 1 DEFINITIONS ..................................................................... 1
1.1 Definitions .................................................................. 1
ARTICLE 2 TERMS OF INVESTMENT ............................................................. 10
2.1 Investment ................................................................... 10
2.2 Collateral ................................................................... 10
2.3 Prepayment ................................................................... 11
2.4 Warrants ..................................................................... 11
2.5 Attorney-in-Fact ............................................................. 12
2.6 Closing. ..................................................................... 12
2.7 Conditions Precedent to the Obligations of Spring Capital and Argosy ......... 12
ARTICLE 3 REPRESENTATIONS AND WARRANTIES .................................................. 14
3.1 Organization; Good-Standing .................................................. 14
3.2 Qualification ................................................................ 14
3.3 Power and Authority .......................................................... 14
3.4 Enforceability ............................................................... 14
3.5 Litigation ................................................................... 15
3.6 Orders; Decrees; Judgments ................................................... 15
3.7 Non-Contravention ............................................................ 15
3.8 Company's Business ........................................................... 15
3.9 Title ........................................................................ 15
3.10 Taxes ........................................................................ 15
3.11 Financial Condition .......................................................... 16
3.12 Solvency ..................................................................... 16
3.13 Material Leases .............................................................. 17
3.14 Material Contracts ........................................................... 17
3.15 Other Document Representations ............................................... 18
3.16 Projections .................................................................. 18
3.17 No Untrue Statements or Material Omissions ................................... 18
3.18 Management History ........................................................... 18
3.19 Company Officers, Directors, and Affiliates .................................. 18
Table Of Contents
(continued)
Page
3.20 Other Debts. ....................................................... 18
3.21 Ownership and Control. ............................................. 18
3.22 No Material Change. ................................................ 19
3.23 No Side Agreements. ................................................ 19
3.24 Legal Compliance. .................................................. 19
3.25 Employee Benefit Matters. .......................................... 20
3.26 Collective Bargaining. ............................................. 21
3.27 Employees. ......................................................... 21
3.28 Insurance. ......................................................... 21
3.29 Licenses. .......................................................... 21
3.30 Subsidiaries. ...................................................... 21
3.31 Intellectual Property. ............................................. 21
3.32 SBA Forms and Representations. ..................................... 22
3.33 Investment Company Act Representations. ............................ 22
ARTICLE 4 AFFIRMATIVE COVENANTS ............................................ 22
4.1 Monthly Financials. ................................................ 22
4.2 Quarterly Financials. .............................................. 23
4.3 Certification of Non-Default. ...................................... 23
4.4 Annual Audit. ...................................................... 23
4.5 Projected Financials. .............................................. 23
4.6 Notice of Filings. ................................................. 23
4.7 Notice of Litigation, etc. ......................................... 23
4.8 Notice of Defaults or Judgments. ................................... 24
4.9 Insurance. ......................................................... 24
4.10 Use of Proceeds. ................................................... 24
4.11 Payments and Obligations to the Holders. ........................... 24
4.12 Other Debts; Taxes. ................................................ 24
4.13 Information Requests. .............................................. 25
4.14 Credit Checks; Access to Records. ................................ 25
4.15 Maintain Copies; Financing Statements. ........................... 25
ii
Table Of Contents
(continued)
Page
4.16 Maintain Existence.................................................. 25
4.17 Protect the Collateral.............................................. 25
4.18 Common Stock Reserves............................................... 25
4.19 Replacement of Warrants............................................. 26
4.20 Intellectual Property............................................... 26
4.21 Board Meetings and Observation Rights............................... 26
4.22 Key Man Insurance................................................... 26
4.23 Director and Officer Liability Insurance............................ 26
4.24 Financial Ratios and Covenants...................................... 26
4.25 Other Post-Closing Affirmative Covenants............................ 27
ARTICLE 5 NEGATIVE COVENANTS.............................................. 28
5.1 Change of Capital Structure......................................... 28
5.2 No Adverse Provisions............................................... 28
5.3 Distributions....................................................... 28
5.4 Dissipation of Assets............................................... 28
5.5 No Encumbrances..................................................... 29
5.6 Prepayments......................................................... 29
5.7 Inside Transactions................................................. 29
5.8 Change of Business, Etc............................................. 29
5.9 Judgments........................................................... 29
5.10 Additional Debts and Liabilities.................................... 29
5.11 Major Expenditures.................................................. 30
5.12 No Adverse Actions.................................................. 30
ARTICLE 6 FEES, EXPENSES AND INDEMNIFICATION.............................. 30
6.1 Fees and Expenses of the Holders.................................... 30
6.2 Other Fees and Expenses............................................. 30
6.3 Indemnification..................................................... 31
6.4 Survival; Timing of Payments........................................ 31
6.5 Third Party Claim Procedures........................................ 32
ARTICLE 7 DEFAULT PROVISIONS.............................................. 32
iii
Table Of Contents
(CONTINUED)
Page
7.1 Monetary Defaults. ....................................................................... 32
7.2 Other Breaches. .......................................................................... 32
7.3 Misrepresentation. ....................................................................... 32
7.4 Loss of Key Employee. .................................................................... 33
7.5 Act of Bankruptcy or Dissolution; ERISA. ................................................. 33
7.6 Final Judgments. ......................................................................... 33
7.7 Other Investment Document Defaults. ...................................................... 33
7.8 Other Defaults Generally. ................................................................ 33
ARTICLE 8 CERTAIN REMEDIES ...................................................................... 33
8.1 Acceleration. ............................................................................ 33
8.2 Post Default Interest. ................................................................... 34
8.3 Sale of Collateral, Etc. ................................................................. 34
8.4 Costs. ................................................................................... 34
8.5 Remedies Non-Exclusive. .................................................................. 34
ARTICLE 9 (INTENTIONALLY OMITTED) ............................................................... 34
aRTICLE 10 RIGHTS OF HOLDERS ..................................................................... 34
10.1 Personal Gain upon Transfer of the Company's Business. ................................... 34
10.2 Redemption Rights. ....................................................................... 35
ARTICLE 11 REPRESENTATIONS, WARRANTIES AND COVENANTS OF spring capital AND ARGOSY ................ 36
11.1 Purchase Without View to Distribute. ..................................................... 36
11.2 Restrictions on Transfer. ................................................................ 36
11.3 Access to Information. ................................................................... 36
11.4 Additional Representations. .............................................................. 37
11.5 Enforceability. .......................................................................... 37
11.6 Brokerage. ............................................................................... 37
ARTICLE 12 MISCELLANEOUS ......................................................................... 37
12.1 Non-Waiver. .............................................................................. 37
12.2 Security Interest Not Impaired. .......................................................... 37
12.3 Notices. ................................................................................. 38
iv
Table Of Contents
(CONTINUED)
Page
12.4 Binding Agreement; Survival. ..................................................... 38
12.5 Entire Agreement; Integration Clause. ............................................ 39
12.6 No Oral Modification or Waivers. ................................................. 39
12.7 Relationship of the Parties; Advice of Counsel. .................................. 39
12.8 Controlling Law; Venue, etc. ..................................................... 39
12.9 Waiver of Trial by Jury. ......................................................... 40
12.10 Costs and Fees Related to Enforcement or a Successful Defense. ................... 40
12.11 Independent Covenant to Make Payments. ........................................... 40
12.12 Headings. ........................................................................ 41
12.13 Severability. .................................................................... 41
12.14 Agreement Between Holders. ....................................................... 41
12.15 Counterparts. .................................................................... 42
v