INTERACTIVE IMAGINATIONS, INC.
SECURITIES PURCHASE AGREEMENT
February 25, 1998
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TABLE OF CONTENTS
Section Page
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1. Purchase and Sale of Preferred Shares and Warrants...................................1
1.1 Sale and Issuance.............................................................1
1.2 Use of Proceeds From Investment...............................................1
1.3 Closing.......................................................................1
2. Representations and Warranties of the Company........................................2
2.1 Organization, Good Standing and Qualification.................................2
2.2 Capitalization................................................................2
2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation...........4
2.4 Subsidiaries..................................................................5
2.5 Financial Information.........................................................5
2.6 Certain Changes or Events.....................................................6
2.7 Tangible Personal Property....................................................7
2.8 Real Property.................................................................7
2.9 Contracts.....................................................................8
2.10 Intellectual Property.........................................................9
2.11 Insurance....................................................................11
2.12 Labor Union Activities; Employee Relations...................................11
2.13 ERISA........................................................................11
2.14 Litigation...................................................................12
2.15 Compliance with Laws; Permits................................................12
2.16 Taxes........................................................................12
2.17 Books and Records............................................................13
2.18 Environmental Matters........................................................13
2.19 Transactions with Affiliates.................................................14
2.20 Registration Rights..........................................................14
2.21 No Brokers or Finders........................................................15
2.22 Investment Company Act.......................................................15
2.23 Disclosure...................................................................15
2.24 Simultaneous Merger..........................................................15
2.25 Public Announcements.........................................................16
2.26 Proprietary Information and Employee Issues..................................16
2.27 Business Plan................................................................16
2.28 Real Property Holding Company................................................16
2.29 Substantial Customers and Suppliers..........................................16
2.30 Accounts Receivable..........................................................17
2.31 Small Business Matters.......................................................17
2.32 Exemption from Registration; Restrictions on Offer and Sale of Same or Similar
Securities...................................................................17
2.33 Series B Shares..............................................................18
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3. Representations, Warranties, and Covenants of the Investors.........................18
3.1 Organization.................................................................18
3.2 Authorization................................................................18
3.3 Offering Exemption...........................................................18
3.4 Knowledge and Experience; Ability to Bear Economic Risks.....................19
3.5 Limitations on Disposition...................................................19
3.6 No Intended Resale...........................................................19
3.7 Legends......................................................................20
3.8 Confidentiality..............................................................20
3.9 Public Announcements.........................................................21
4. Conditions of Investors' Obligations at Closing.....................................22
4.1 Representations and Warranties...............................................22
4.2 Performance..................................................................22
4.3 Stock Certificates, Etc......................................................22
4.4 No Material Adverse Change...................................................22
4.5 Consents.....................................................................22
4.6 No Litigation................................................................22
4.7 Opinion of Counsel...........................................................23
4.8 Compliance Certificate.......................................................23
4.9 Directors....................................................................23
4.10 Related Agreements...........................................................23
4.11 Proceedings and Documents....................................................23
4.12 Secretary's Certificate......................................................23
4.13 Qualification of Securities..................................................23
4.14 Filing of Restated Certificate...............................................24
4.15 Purchase By Other Investors..................................................24
4.16 Payment of Investor Expenses.................................................24
5. Conditions of the Company's Obligations at Closing..................................24
5.1 Representations and Warranties...............................................24
5.2 Payment of Purchase Price....................................................24
5.3 No Litigation................................................................24
5.4 Proceedings and Documents....................................................24
6. Certain Covenants...................................................................25
6.1 Financial and Business Information...........................................25
6.2 Exemption from Investment Company Act........................................27
6.3 Accounting and Reserves......................................................27
6.4 Rights to Purchase Additional Securities.....................................27
6.5 Confidentiality..............................................................29
6.6 Ordinary Course Obligations..................................................29
6.7 Taxes Relating to this Agreement.............................................30
6.8 Replacement of Instruments...................................................30
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6.9 Reincorporation in Delaware..................................................31
6.10 SBA Forms; Inspection........................................................31
6.11 Corporate Existence; Approvals...............................................31
6.12 Taxes........................................................................31
6.13 Insurance....................................................................31
6.14 Notice of Certain Events.....................................................32
6.15 Maintenance of Properties....................................................32
6.16 Reservation of Shares........................................................32
6.17 Venture Capital Operating Company Status.....................................32
6.18 Director and Officer Insurance...............................................32
6.19 Further Assurances...........................................................33
6.20 Use of Proceeds..............................................................33
6.21 Reports Under the Exchange Act...............................................33
6.22 Actions Requiring Written Consent of Investors...............................33
7. Miscellaneous................................................................36
7.1 Expenses.....................................................................36
7.2 Taxes........................................................................36
7.3 Replacement of Instruments...................................................36
7.4 Use of Investors' Names......................................................36
7.5 Indemnification..............................................................37
7.6 Right to Rely................................................................37
7.7 Survival.....................................................................37
7.8 Successors and Assigns.......................................................38
7.9 Entire Agreement; Amendment and Waiver.......................................38
7.10 Applicable Law...............................................................38
7.11 Notices......................................................................38
7.12 Brokerage....................................................................38
7.13 Severability.................................................................39
7.14 Descriptive Headings.........................................................39
7.15 Counterparts; Signatures by Facsimile........................................39
7.16 Understanding Among Investors................................................39
7.17 Further Assurances...........................................................39
7.18 Knowledge....................................................................39
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EXHIBIT LIST
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Exhibit A Restated Certificate of Incorporation
Exhibit B 1 Form of Class A Warrant
Exhibit B 2 Form of Class B Warrant
Exhibit C Business Plan
Exhibit D ByLaws of the Company
Exhibit E Certificate of Incorporation of the Subsidiary
Exhibit F ByLaws of the Subsidiary
Exhibit G Shareholders' Agreement
Exhibit H Registration Rights Agreement
Exhibit I Opinion of Proskauer Rose LLP
Exhibit J NonCompetition Agreement
Exhibit K NonDisclosure and Developments Agreement
Exhibit L SBA Certificate
Exhibit M 1998 Stock Incentive Plan
Exhibit N Other Financial Information
SCHEDULE LIST
Schedule 1 Schedule of Exceptions
Schedule 2 Names of Shareholders and Holders of Options and/or
Warrants, etc.
Schedule 3 Directors
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Cross References to Selected Definitions
Term Section Location
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Action ss. 2.14
Advercomm ss. 2.5(c)
Agreement Prefatory Language
Business Combination ss. 2.9(k)
Business Plan ss. 1.2
Closing ss. 1.3
Code ss. 2.16
Common Shares ss. 1.1
Company Prefatory Language
Company Documents ss. 2.3
Contracts ss. 2.9
Conversion Shares ss. 1.1
Environmental Laws ss. 2.18
ERISA ss. 2.13
Financial Statements ss. 2.5(a)
GAAP ss. 2.5(a)
Governmental Authority ss. 2.3
Indebtedness ss. 2.5(d)
Intellectual Property ss. 2.10
Interim Financial Statements ss. 2.5(b)
Investors Prefatory Language
Laws ss. 2.2
Liens ss. 2.2
Merger ss. 2.24
New Securities ss. 6.4(b)
Operating IP ss. 2.10
Option ss. 2.2
Order ss. 2.14
Other Financial Information ss. 2.5(c)
Permits ss. 2.15
Person ss. 2.3
Petry ss. 2.5(c)
Principal Owner ss. 2.9(d)
Qualified Public Offering ss. 6.4(f)
Registration Rights Agreement ss. 2.2
Related Agreements ss. 4.10
Required Holders ss. 6.22
Restated Certificate ss. 1.1
Returns ss. 2.16
Rule 144 ss. 3.5
SBA ss. 2.31
SBA Act ss. 2.31
SBA Regulation ss. 2.31
SBIC ss. 2.31
Scheduled Contracts ss. 2.9
Securities ss. 1.1
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Term Section Location
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Securities Act ss. 2.20
Series B Shares ss. 1.1
Shareholders' Agreement ss. 2.2
Shares ss. 1.1
Stock Incentive Plan ss. 6.22(b)
Stock Incentives ss. 2.2
Subsidiary ss. 2.1
Taxes ss. 2.16
VCOC ss. 6.17
Warrants ss. 1.1
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EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is made as of this
25th day of February, 1998 by and between Interactive Imaginations, Inc., a New
York corporation (the "Company"), and each of the persons identified on the
signature pages hereto as an "Investor" (such persons collectively, the
"Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Preferred Shares and Warrants.
1.1 Sale and Issuance. Subject to the terms and conditions of
this Agreement, each Investor, severally and not jointly, agrees to purchase at
the Closing (as hereinafter defined), and the Company agrees to sell and issue
to each Investor, severally and not jointly, the number of Series B Convertible
Voting Preferred Shares, par value $.01 per share (the "Series B Shares"), of
the Company and the number of Class A Warrants and Class B Warrants set forth on
the signature page hereto of such Investor, all at the aggregate purchase price
set forth on such signature page.
The Series B Shares shall have the powers, rights, preferences
and privileges set forth in the Restated Certificate of Incorporation of the
Company attached hereto as Exhibit A (the "Restated Certificate"). The Class A
and Class B Warrants shall be in the forms of warrant attached hereto as Exhibit
B-1 and B-2, respectively.
The Series B Shares sold to the Investors pursuant to this
Agreement are sometimes hereinafter referred to as the "Shares"; the Class A
Warrants and Class B Warrants sold to the Investors pursuant to this Agreement
are sometimes hereinafter referred to as the "Warrants"; the common shares, par
value $0.01 per share, of the Company (the "Common Shares") issuable upon
conversion of the Shares or exercise of the Warrants are sometimes hereinafter
referred to as the "Conversion Shares". The Shares, the Warrants and the
Conversion Shares are sometimes hereinafter collectively referred to as the
"Securities".
1.2 Use of Proceeds From Investment. The proceeds from the sale
of the Shares and the Warrants will be used to conduct the business of the
Company in accordance with the approved business plan (the "Business Plan")
attached hereto as Exhibit C.
1.3 Closing. The purchase and sale of the Securities shall take
place at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York
10036, at 9:00 a.m., on February 25, 1998, or at such other time and place as
the Company and the Investors purchasing a majority of the Securities mutually
agree (which time and place are designated as the "Closing"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Shares
to be purchased by such Investor, together with the Warrants to be purchased by
such Investor, in each case registered
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in the name of such Investor as it appears on the signature pages hereto against
delivery to the Company by such Investor of a wire transfer in the amount of the
aggregate purchase price therefor.
2. Representations and Warranties of the Company. The Company (which,
for purposes of this Article 2, includes 24/7 Media, Inc., a Delaware
corporation (the "Subsidiary"), except where the context clearly indicates
otherwise) and the Subsidiary (which, for the purposes of this Article 2,
includes 24/7 Media, Inc., Petry Interactive, Inc., a Delaware corporation, and
Advercomm, Inc., a Delaware corporation, including all of their respective
assets and liabilities, except where the context clearly indicates otherwise)
jointly and severally hereby represent and warrant to, and agree with the
Investors except as set forth on the Schedule of Exceptions furnished to the
Investors and attached hereto as Schedule 1, specifically identifying the
relevant subsection hereof with respect to which an exception is being made,
which exceptions shall be deemed to be representations and warranties as if made
hereunder, as follows:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of New York. The Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company and the Subsidiary each have all requisite power and authority to
carry on their respective businesses as now conducted and as proposed to be
conducted. The Company and the Subsidiary each are duly qualified to transact
business and are in good standing in each jurisdiction in which the failure so
to qualify can in the aggregate be eliminated without material cost or expense
by the Company or the Subsidiary. The Subsidiary is a newly formed corporation
which has not engaged in any business other than in connection with its
organization and the transactions contemplated by the Agreement and Plan of
Merger in connection with the Merger (as defined in Section 2.24). Annexed
hereto as Exhibit D, Exhibit E and Exhibit F, respectively, are true and
complete copies of the By-Laws of the Company, the Certificate of Incorporation
of the Subsidiary, and the By-Laws of the Subsidiary, each as amended through
the date hereof.
2.2 Capitalization. After giving effect to the transactions
contemplated by this Agreement, including the Merger (as defined in Section
2.24), and immediately after the Closing, the capital stock of the Company, as
authorized by the Restated Certificate, will consist of: (i) 100,000,000 Common
Shares, of which 27,481,201 shares will be issued and outstanding, 10,060,002
shares will be reserved for issuance upon conversion of issued and outstanding
Shares, 5,000,000 shares will be reserved for issuance upon exercise of issued
and outstanding Class A Warrants, 5,000,000 shares will be reserved for issuance
upon exercise of issued and outstanding Class B Warrants, 2,575,000 will be
reserved for issuance upon exercise of issued and outstanding Class C Warrants,
142,421 will be reserved for issuance upon exercise of issued and outstanding
unclassified warrants, 251,028 (subject to adjustment) will be reserved for
issuance upon exercise of issued and outstanding convertible debentures, and
5,750,000 shares will be reserved for issuance to key employees, officers and
directors of, and consultants to, the Company under stock incentives that have
been granted or are available for grant by the Company pursuant to the Stock
Incentive Plan (as defined in Section 6.22(b)) (collectively, the "Stock
Incentives"); and (ii) 30,000,000 preferred shares, of which none are
outstanding and of which 10,060,002 shares have been designated as Series B
Shares, all of which are being issued to the Investors hereunder. The rights,
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privileges and preferences of the Common Shares and Series B Shares are as
stated in the Restated Certificate. Except for the Stock Incentives specified
above, the conversion rights of issued and outstanding Series B Shares, the
conversion rights of outstanding convertible debentures specified above, and the
exercise rights of issued and outstanding Class A, Class B, Class C Warrants and
unclassified warrants specified above, as of the Closing, the Company will not
(i) have outstanding any capital stock or other securities convertible into or
exchangeable for any shares of its capital stock and, except for the preemptive
rights contained in this Agreement, no Person will have any right to subscribe
for or to purchase (including conversion or preemptive rights), or any Options
for the purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, any calls, commitments or other claims of any character relating
to, any capital stock or any stock or securities convertible into or
exchangeable for any capital stock of the Company; (ii) have any capital stock,
equity interests or other securities reserved for issuance for any purpose; or
(iii) be subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any convertible
securities, rights or options of the type described in the preceding clause (i).
"Option" with respect to any Person means any security, right, subscription,
warrant, option, "phantom" stock right or other Contract that gives the right
directly or indirectly to (i) purchase or otherwise receive or be issued any
shares of capital stock of such Person or any security of any kind convertible
into or exchangeable or exercisable for any shares of capital stock of such
Person or (ii) receive or exercise any benefits or rights similar to any rights
enjoyed by or accruing to the holder of shares of capital stock of such Person,
including any rights to participate in the equity or income of such Person or to
participate in or direct the election of any directors or officers of such
Person or the manner in which any shares of capital stock of such Person are
voted. Neither this Agreement nor the transactions contemplated hereby or by the
Merger will cause any anti-dilution adjustment or accelerated vesting of any
Options. All issued and outstanding Common Shares have been duly and validly
issued and subject to Section 630 of the New York Business Corporation Law, are
fully paid and nonassessable and were issued in accordance with the registration
or qualification provisions of the Securities Act and any applicable state
securities laws or pursuant to valid exemptions therefrom. All of the Series B
Shares and Conversion Shares, when issued as contemplated hereby, will be
validly issued and, subject to Section 630 of the New York Business Corporation
Law, fully paid and nonassessable and will be issued in accordance with the
registration or qualification provisions of the Securities Act and any
applicable state securities laws or pursuant to valid exemptions therefrom. The
delivery of a certificate or certificates at the Closing representing the Shares
and the Warrants in the manner provided in Section 1.3 will transfer to each
Investor good and valid title to the Shares and the Warrants, respectively, free
and clear of all liens, pledges, assessments, leases, security interests,
claims, encumbrances, or other restrictions of any kind (collectively, "Liens").
To the best knowledge of the Company, there are no agreements among the
Company's shareholders with respect to the voting or transfer of the Company's
capital stock, other than the agreements relating to transfer contained in the
Shareholders' Agreement in the form of Exhibit G attached hereto (the
"Shareholders' Agreement"), and the Registration Rights Agreement in the form of
Exhibit H attached hereto (the "Registration Rights Agreement"). Schedule 2
includes a complete and correct list of the name of each of the Company's
investors and shareholders and the number of shares of capital stock (and class
or series) owned by such Person, and the name of each holder of an outstanding
Option and the number of Options to purchase capital stock owned by such holder
and the exercise price at which, and the period during which, such Option(s) may
be exercised and the vesting schedule thereof, if any. The authorized capital
stock
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of the Subsidiary consists of 1,000 common shares, par value $.01 per share, of
which 100 are outstanding as of the date hereof. The Company owns, beneficially
and of record, all of the issued and outstanding shares of capital stock of the
Subsidiary, free and clear of all Liens. All of the issued and outstanding
shares of capital stock of the Subsidiary have been duly and validly issued and
are fully paid and nonassessable and were issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom. There are no
outstanding Options with respect to the Subsidiary.
2.3 Authority; Execution and Delivery; Requisite Consents,
Nonviolation. The Company has, and as of the Closing will have, all requisite
power and authority to execute, deliver and perform this Agreement, the
Shareholders' Agreement, the Registration Rights Agreement, Restated
Certificate, Warrants, Securities and each other document or instrument executed
by it, or any of its officers, in connection herewith or therewith or pursuant
hereto or thereto (this Agreement, together with all of the foregoing documents
and instruments, are sometimes collectively referred to herein as the "Company
Documents"), and to consummate the transactions contemplated hereby and thereby.
The name of each officer and director of the Company and of the Subsidiary on
the date hereof, and the position with the Company held by each, are listed on
Part 2.3 of Schedule 1 hereto. The execution, delivery and performance of this
Agreement and the other Company Documents and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of the Company and its
shareholders. This Agreement and each of the other Company Documents that has
been executed as of the date hereof is, and each of the Company Documents will
be as of the Closing, duly and validly executed and delivered by the Company and
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency or other similar laws affecting
the enforceability of creditors' rights in general or by general principles of
equity. The execution, delivery and performance of this Agreement and the other
Company Documents (including, without limitation, the Shareholders' Agreement,
the Registration Rights Agreement, the Restated Certificate and the Warrants),
the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the offer, sale and delivery by the
Company of the Securities) will not (a) require the consent, license, permit,
waiver, approval, authorization or other action of, by or with respect to, or
registration, declaration or filing with, any court or governmental authority,
department, commission, board, arbitrator, bureau, agency or instrumentality, or
other political subdivision, domestic or foreign ("Governmental Authority") or
any other individual, partnership, corporation, unincorporated organization or
association, limited liability company, trust or other entity (collectively, a
"Person"); (b) violate or conflict with any provision of the Restated
Certificate, the Certificate of Incorporation or of the By-Laws of the Company
or Subsidiary as in effect immediately prior to and immediately after the
execution and delivery of this Agreement; or (c) constitute a default under
(with or without notice or lapse of time or both), violate or conflict with,
give rise to a right of termination, cancellation, acceleration or modification
under or result in a loss of a material benefit under, any Law (as defined in
Section 2.15 below), Scheduled Contract (as defined in Section 2.9 below),
rights relating to Intellectual Property (as defined in Section 2.10 below),
Permit (as defined in Section 2.15 below) or Order (as defined in Section 2.14
below) to which the Company or the Subsidiary is a party or by which the Company
or its properties or the Subsidiary or its properties are bound or give to any
Person any additional rights or entitlements to increased,
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additional, accelerated or guaranteed payments under or result in creation or
imposition of any Lien upon the Company or the Subsidiary or any of its
respective assets and properties.
2.4 Subsidiaries.
The Company does not, and prior to the Closing will not, own or
control, directly or indirectly, any partnership interests, stock or other
equity interests in any partnership, corporation or other entity or Person or
any voting rights or right to control the policies and direction of any
partnership, corporation or other entity, other than the Subsidiary.
2.5 Financial Information.
(a) The Company has previously delivered to the Investors its
historical audited balance sheets as at December 31, 1996, and the historical
audited statements of income, shareholders' equity and cash flows for the year
then ended (collectively, the "Financial Statements"). Such Financial Statements
have been prepared from the books and records of the Company and present fairly
the financial position and the results of operations and cash flows of the
Company as at and for the periods indicated, in each case in conformity with
generally accepted accounting principles ("GAAP") consistently applied (except
as described in such statements or the notes thereto).
(b) The Company has previously delivered to the Investors an
historical unaudited balance sheet of the Company as at December 31, 1997 and an
historical unaudited statement of income, shareholders' equity and cash flows
for the twelve-month period then ended (the "Interim Financial Statements").
Such Interim Financial Statements have been prepared from the books and records
of the Company and present fairly the financial position and the results of
operations of the Company as at and for the period indicated, in each case in
conformity with GAAP, subject to customary year or period end audit adjustments
and accruals and the absence of notes thereto, (except as previously noted)
consistently applied.
(c) The Company has previously delivered to the Investors
unaudited balance sheets as of December 31, 1997 and certain historical
statements of operations regarding Petry Interactive, Inc. ("Petry") and
Advercomm, Inc. ("Advercomm") (the "Other Financial Information"), attached
hereto as Exhibit N. Such Other Financial Information has been prepared from the
books and records of Petry and Advercomm, respectively, and present fairly the
financial position and the results of operations of Petry and Advercomm in each
case in accordance with GAAP, subject to customary year or period end
adjustments and accruals and the absence of notes thereto, as at and for the
periods indicated.
(d) Except as disclosed in the Interim Financial Statements
or Other Financial Information, neither the Company nor the Subsidiary has any
liabilities or obligations, absolute or contingent, except (i) obligations and
liabilities incurred in the ordinary course of business, consistent with past
practice, since the date of the Interim Financial Statements or Other Financial
Information, (ii) obligations which are not required to be reflected in the
Financial Statements or such Interim Financial Statements and which would not be
required under GAAP to
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be included in the notes to such Financial Statements, which individually and in
the aggregate are not material to the financial condition or operating results
of the Company or the Subsidiary. Except as disclosed in the Interim Financial
Statements or Other Financial Information, the Company is not a guarantor or
indemnitor of any obligations of any Person (i) for borrowed money, (ii)
evidenced by notes, bonds, debentures or similar instruments, (iii) for the
deferred purchase price of goods or services (other than trade payables or
accruals incurred in the ordinary course of business), (iv) under capital leases
and (v) in the nature of guarantees of the obligations described in clauses (i)
through (iv) ("Indebtedness") of any other Person. The Company and the
Subsidiary maintain and will continue to maintain a standard system of
accounting established and administered in accordance with GAAP.
(e) No representation is made hereunder with respect to any
forecasts, projections or forward looking information provided to the Investors
in connection with the Financial Statements, the Interim Financial Statements,
Other Financial Information or otherwise, except that the Company represents
that any such forecasts, projections and forward looking information were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such forecasts, projections and forward looking
information.
2.6 Certain Changes or Events. Other than transactions entered
into in connection with the Merger (as defined in Section 2.24), since December
31, 1996 the business of the Company has been operated only in the ordinary
course, consistent with past practice, and in addition to, and not in limitation
of the foregoing: (i) there has been no change in the Condition of the Company,
except for changes in the ordinary course of business consistent with past
practice which have not been, in the aggregate, materially adverse to the
Company; (ii) there has been no revocation or change in any Contract or Permit
or right to do business, and, to the best knowledge of the Company, no change of
Laws which has resulted, or could reasonably be expected to result, in a
material adverse change in the Condition of the Company; (iii) the Company has
not authorized or made any distributions of, or declared or paid any dividends,
upon or with respect to any of the capital stock of the Company or the
Subsidiary, or other equity interests, nor has the Company redeemed, purchased
or otherwise acquired, or issued or sold, any of its capital stock or other
equity interests; (iv) the Company has not entered into any transaction with a
value in excess of $50,000 or other material transaction, other than in the
ordinary course of business and consistent with past practice; (v) the Company
has not incurred any Indebtedness for borrowed money or made any loans or
advances to any Person except for convertible debentures incurred and
subsequently converted to Common Shares of the Company on or prior to the date
hereof; (vi) there has been no waiver by the Company of a valuable right or of a
material debt owed to it, including any right or Indebtedness with a value in
excess of $50,000; (vii) the Company has not failed to satisfy or discharge any
Lien (as defined in Section 2.7 below); (viii) there has not been any damage,
destruction or loss, whether or not covered by insurance, materially and
adversely affecting the assets, properties, financial condition, operating
results, prospects or business of the Company (as such business is presently
conducted and as it is proposed to be conducted); (ix) there has not been any
material change in any compensation arrangement (including, without limitation,
benefits) or agreement with any employee or consultant of the Company; (x) there
has not been any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets of the Company; (xi) there
has not been any resignation or termination of employment of any key officer or
employee or consultant of
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the Company and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer, employee
or consultant; (xii) there has been no receipt of notice that there has been a
loss of, or material order cancellation by, any major customer of the Company;
(xiii) there has been no mortgage, pledge or transfer of a security interest in,
or lien, created or suffered to exist by the Company with respect to any of its
material properties or assets, except Liens for taxes not yet due or payable;
(xiv) there have been no loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business consistent with past practice; (xv) any change
in the accounting, pricing, inventory, credit, financial reporting or tax
methods or procedures of the Company or Subsidiary or any other transaction
involving or development affecting the Company or Subsidiary outside the
ordinary course of business consistent with past practice; and (xvi) there has
been no agreement or commitment by the Company to do or perform any of the acts
described in this Section 2.6.
2.7 Tangible Personal Property. The Company and the Subsidiary,
respectively, are in possession of and have good and marketable title to or has
valid leasehold interests in or valid rights under Contract to use, all tangible
personal property used in the conduct of its business, including all tangible
personal property reflected on the Financial Statements for the period ended
December 31, 1996, the Interim Financial Statements for the period ended
December 31, 1997 and Other Financial Information for the period ended December
31, 1997 and tangible personal property acquired since each such date other than
property disposed of since such date in the ordinary course of business
consistent with past practice and the terms of this Agreement and the Company
Documents. All such tangible personal property is free and clear of all Liens,
and is adequate and suitable for the conduct by the Company and the Subsidiary,
respectively, of the business presently conducted and presently proposed to be
conducted by it, and is in good working order and condition, ordinary wear and
tear excepted, and its use complies in all material respects with all applicable
Laws.
2.8 Real Property. (a) Part 2.8 of Schedule 1 contains a true and
correct list of (i) each parcel of real property leased by the Company or the
Subsidiary (as lessor or lessee) and (ii) all Liens relating to or affecting any
parcel of real property referred to in clause (i).
(b) Neither the Company nor the Subsidiary owns any real
property.
(c) The Company and the Subsidiary have a valid and subsisting
leasehold estate in and the right to quiet enjoyment of the real
properties leased by them, respectively, for the full term of the
lease thereof. Each lease referred to in clause (i) of paragraph (a)
above is a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Company, of the Subsidiary and of
each other Person that is a party thereto, and except as set forth
in Part 2.8 of Schedule I hereto, there is no, and neither the
Company nor the Subsidiary has received notice of any, default (or
any condition or event which, after notice or lapse of time or both,
would constitute a default) thereunder. Neither the Company nor the
Subsidiary owes any brokerage commissions or finders fees with
respect to any such leased space.
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(d) The Company and the Subsidiary have delivered to the
Investors prior to the execution of this Agreement true and complete
copies of all leases (including any amendments and renewal letters).
(e) Except as disclosed in Part 2.8 of Schedule 1 hereto, the
improvements on the real property identified in Part 2.8 of Schedule
1 hereto are in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted, are
adequate and suitable for the purposes for which they are presently
being used and, to the knowledge of the Company and the Subsidiary,
there are no condemnation or appropriation proceedings pending or
threatened against any of such real property or the improvements
thereon.
2.9 Contracts. The Company and the Subsidiary are not a party to,
nor is the Company or the Subsidiary or any of their respective assets or
properties bound by, or subject to, any contracts, agreements, notes,
instruments, franchises, leases, licenses, commitments, arrangements or
understandings, written or oral (collectively, "Contracts") of the following
types, except for those (the "Scheduled Contracts") listed in Part 2.9 of
Schedule 1 hereto:
(a) any Contracts pursuant to which the Company, the
Subsidiary, or another party thereto, is obligated to pay in excess of
fifty thousand dollars ($50,000);
(b) any Contracts pursuant to which the Company or any
Subsidiary acquired the right to use any Intellectual Property or
information that is material to or necessary in the business of the
Company, or pursuant to which the Company has granted to others the
right to use, or which otherwise relates to, its Intellectual Property;
(c) any Contracts (other than advances of expenses to
employees in the ordinary course of business) involving Indebtedness,
loans, loan agreements, debt securities, mortgages, deeds of trust,
security agreements, suretyships or guarantees;
(d) any Contracts between the Company or any Subsidiary,
on the one hand, and any of its officers, directors, employees,
stockholders or any direct or indirect Affiliates or Associates thereof
(each, a "Principal Owner"), on the other;
(e) any deferred compensation agreements, bonus, pension,
profit sharing, stock option and incentive plans or arrangements,
hospitalization, medical and insurance plans, agreements and policies,
retirement and severance plans and other employee compensation policies
and agreements affecting employees or consultants of the Company;
(f) any Contracts with any labor union;
(g) all partnership, joint venture, shareholders' or
similar Contracts with any Person;
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(h) all Contracts that limit or contain restrictions on
the ability of the Company or any Subsidiary to declare or pay
dividends, to make distributions in respect of or to issue or purchase,
redeem or otherwise acquire any of its capital stock or require the
Company or any Subsidiary to maintain specified financial ratios or
levels of net worth or other indicia of financial condition;
(i) any Contracts which restrict the Company or any
Subsidiary from freely engaging in business, disclosing confidential or
proprietary information, or competing anywhere;
(j) any Contracts which otherwise are material to the
Condition of the Company or any Subsidiary;
(k) all Contracts related to (A) the future disposition or
acquisition of any assets or properties other than dispositions or
acquisitions in the ordinary course of business consistent with past
practice and the provisions of this Agreement and the Company Documents,
and (B) any (i) merger, consolidation or combination to which such
Person is a party, (ii) any sale, dividend, split or other disposition
of any capital stock or other equity interests of such Person, (iii) any
tender offer (including without limitation a self-tender), exchange
offer, recapitalization, liquidation, dissolution or similar
transaction, (iv) any sale, dividend or other disposition of all or a
material portion of the assets and properties of such Person, (v) any
sale, transfer or other disposition of any securities of the Company by
any Stockholder or (vi) the entering into of any agreement or
understanding, or the granting of any rights or options, with respect to
any of the foregoing ("Business Combination").
True, correct and complete copies of all Scheduled Contracts have
been made available to the Investors. All of the Scheduled Contracts are in full
force and effect and constitute legal, valid and binding obligations of the
Company or the Subsidiary and, to the best knowledge of the Company or the
Subsidiary, the other parties thereto; to the best of the knowledge of the
Company and the Subsidiary, no circumstances exist which would give rise to an
Action (as defined in Section 2.14) against or by the Company or the Subsidiary
in connection with any Scheduled Contract or any default thereunder; and the
validity, effectiveness and continuation of all Scheduled Contracts will not be
adversely affected by the transactions contemplated by this Agreement or require
third party consents or notices.
2.10 Intellectual Property.
(i) Set forth on Part 2.10 of Schedule 1 hereto is a true,
correct and complete list of all patents, patent applications,
trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights and licenses trade names, and
any applications or registrations for any of the foregoing
(collectively, the "Intellectual Property") of any kind in which the
Company has an interest or which is otherwise used in, or relates to
the business of, the Company. Part 2.10 of Schedule 1 hereto contains
a true, correct and complete list of all material licenses or
agreements (other than the Company's standard form of web site
affiliate agreements) relating to the rights of the Company to any
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of the Operating IP (defined below) or any trade secret material of
the Company (the "Intellectual Property Licenses").
(ii) With respect to any Intellectual Property, brand name,
computer software or program, technology, know-how or process or
copyright (collectively (including without limitation the Intellectual
Property), the "Operating IP") or trade secret that is used in or that
relates to its business, the Company owns or has the exclusive right
to use such Operating IP or trade secret in its business free and
clear of all Liens. The Company owns or has the exclusive right to use
all Operating IP and trade secrets that are necessary to its business
as now conducted or proposed to be conducted.
(iii) Each of the Intellectual Property Licenses constitutes
a legal, valid, binding and enforceable obligation in accordance with
its terms against the Company, and, to the best knowledge of the
Company, each other Person party thereto, and to the best knowledge of
the Company is in full force and effect. The Company has performed all
obligations required to have been performed by it under each of the
Intellectual Property Licenses to which it is a party. Neither the
Company nor, to the best knowledge of the Company, any other party
thereto is in default thereunder, nor, to the best knowledge of the
Company, is there any event that with notice or lapse of time, or
both, would constitute a default thereunder. The Company has not
received any notice that any other party to any of the Intellectual
Property Licenses intends to cancel, terminate or refuse to renew the
same or to exercise or decline to exercise any option or other right
thereunder (other than in the ordinary course of business). No
licenses, sublicenses, covenants or agreements have been granted or
entered into by the Company in respect of any of the Operating IP or
any trade secret of the Company, except the Intellectual Property
Licenses. No director, officer, shareholder, employee or other
Affiliate of the Company owns, directly or indirectly, in whole or in
part, any of the Operating IP or any trade secret used by or relating
to the Company. None of the officers, employees, consultants,
distributors, agents, representatives or advisors of the Company have
entered into any agreement relating to the Company's business
regarding know-how, trade secrets, assignment of rights in inventions,
or prohibition or restriction of competition or solicitation of
customers, or any other similar restrictive agreement or covenant,
whether written or oral, with any Person other than the Company. There
are no restrictions on the direct or indirect transfer of any
Intellectual Property or license to use the Intellectual Property, or
any interest therein, held by the Company or the Subsidiary of such
Intellectual Property.
(iv) The consummation of the transactions contemplated
hereby will not alter or impair the rights of the Company to any of
the Operating IP, to any trade secret material to the Company, or
under any of the Intellectual Property Licenses.
(v) No claim with respect to the Operating IP, any trade
secret or any Intellectual Property License is currently pending or
has been asserted or overtly threatened by any Person, nor does the
Company know of any grounds for any claim, (A) to the effect that any
operation or activity of the Company presently occurring or
contemplated infringes or misappropriates any United States or foreign
copyright, patent, trademark, service mark
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or trade secret; (B) to the effect that any other Person infringes on
the Operating IP or misappropriates any trade secret or know-how or
other proprietary rights of the Company; (C) challenging the
ownership, validity or effectiveness of any of the Operating IP or any
trade secret of the Company; or (D) challenging the license of the
Company to, or other legally enforceable right under, any Operating IP
or the Intellectual Property Licenses.
(vi) The Company is not aware of any presently existing
United States or foreign patents or any patent applications which, if
issued as patents, would be infringed by any activity contemplated by
the Company.
2.11 Insurance. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, products liability
insurance, general liability insurance, errors and omissions insurance, and
directors' and officers' insurance in amounts customary for companies similarly
situated. None of such insurance coverage will terminate or lapse by reason of
this Agreement or the transactions contemplated hereby. Each insurance policy is
valid and binding and in full force and effect, no premiums due thereunder have
not been paid and neither the Company, any Subsidiary nor the Person to whom
such policy has been issued has received any notice of cancellation or
termination in respect of any such policy or is in default thereunder. Such
insurance policies are placed with financially sound and reputable insurers and,
in light of the respective business, operations and assets and properties of the
Company and the Subsidiary, are in amounts and have coverages that are
reasonable and customary for Persons engaged in such businesses and operations
and having such assets and properties. Neither the Company nor the Person to
whom such policy has been issued has received notice that any insurer under any
policy referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
2.12 Labor Union Activities; Employee Relations. No employee of
the Company is represented by any labor union or covered by any collective
bargaining agreement with the Company; nor, to the best knowledge of the
Company, has any labor union sought to represent any employee of the Company.
There is no strike or other labor dispute involving the Company pending, or to
the best knowledge of the Company, threatened. To the best knowledge of the
Company, no officer or key employee intends to terminate his employment with the
Company. To the best knowledge of the Company, no officer or key employee of the
Company is a party to or bound by any Contract, or subject to any restrictions
(including, without limitation, any non-competition restriction), which would
restrict the right of such person to participate in the affairs of the Company.
The Company has complied in all material respects with all applicable Laws
relating to the employment of labor, including without limitation, those
relating to wages, hours and collective bargaining. No unfair labor practice
complaint or sex or age discrimination claim had been brought against the
Company before the National Labor Relations Board or any other Governmental
Authority.
2.13 ERISA. There are no employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"))
covering former or current employees of the Company, or under which the Company
has any obligation or liability. The Company has not incurred any liability
under Title IV of ERISA, including any liability to the
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Pension Benefit Guaranty Corporation. Part 2.13 of Schedule 1 lists all material
plans, contracts, bonus and commission arrangements, profit-sharing, savings,
stock option plans, insurance, deferred compensation, or other similar fringe or
employee benefits covering former or current employees of the Company or under
which the Company has any obligation or liability (each, a "Benefit
Arrangement"). The Benefit Arrangements are and have been administered in
substantial compliance with their terms and with the requirements of applicable
law.
2.14 Litigation. There is no action, suit, proceeding,
investigation, audit, arbitration or governmental approval process
(collectively, "Action") pending or, to the best knowledge of the Company,
threatened against, relating to or affecting the Company or any of the
properties or assets of the Company (including, without limitation, any of its
Permits), nor, to the best knowledge of the Company, is there any basis for any
such Action. Neither the Company nor any of its assets or properties is subject
to any order, judgment, writ, injunction, decree, ruling or decision
(collectively, an "Order") of any Governmental Authority. There is no Action by
the Company currently pending or which the Company intends to initiate.
2.15 Compliance with Laws; Permits. The Company has not violated
or failed to comply with, in any material respect, any statute, law, ordinance,
rule, regulation or policy of any Governmental Authority (collectively, "Laws")
to which it or any of its properties or assets is subject. The Company has all
permits, licenses, orders, certificates, authorizations, registrations,
franchises, and approvals of any Governmental Authority (collectively, the
"Permits") that are material to the conduct of its business as presently
conducted and as proposed to be conducted, including without limitation, those
required by Environmental Laws; all such Permits are, and as of the Closing will
be, valid, binding and in full force and effect; no violations or notices of
failure to comply have been issued or recorded in respect of any such Permits.
The Company is in compliance in all material respects with the terms and
conditions of all such Permits. All applications, reports, notices and other
documents required to be filed by the Company with all Governmental Authorities
have been timely filed and are complete and correct in all material respects as
filed or as amended prior to the date hereof. The Company and the Subsidiary
have not violated or failed to comply with their certificates of incorporation
or by-laws.
2.16 Taxes. All federal, state, city, county, local and foreign
income, franchise, sales, use and value added tax returns and reports, and all
other material tax returns and reports required to be filed by the Company in
those or in any other jurisdiction (collectively, "Returns")
have been timely filed. All such Returns are true, correct and complete in all
material respects. All taxes, assessments, fees, interest, penalties and other
charges with respect thereto (collectively, "Taxes") due or claimed to be due
from the Company have been paid except to the extent reserved against on the
Interim Financial Statements or the Other Financial Information. No income tax
return of the Company has been audited by the applicable Governmental Authority,
and there are in effect no waivers of the applicable statute of limitations for
Taxes in any jurisdiction for the Company for any period. The provision for
taxes of the Company as shown in the Interim Financial Statements and the
provision for taxes for Petry and Advercomm as shown in the Other Financial
Information are adequate for taxes due or accrued as of the date thereof. Each
of the Company, Petry, Advercomm and the Subsidiary has not elected pursuant to
the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a
Subchapter S corporation or a collapsible
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corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor have
they made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on the Company, Petry, Advercomm or the Subsidiary, their
financial condition, their business as presently conducted or proposed to be
conducted or any of their properties or material assets. The Company, Petry,
Advercomm and the Subsidiary have never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
Since the date of the Interim Statements, the Company has made adequate
provisions on its books of account for, and since the date of the Other
Financial Information, Petry, Advercomm and the Subsidiary have made adequate
provisions on their books of account for, all taxes, assessments and
governmental charges with respect to its business, properties and operations for
such period. The Company, Petry, Advercomm and the Subsidiary have withheld or
collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
2.17 Books and Records. The books of account, ledgers and records
of the Company as made available to the Investors prior to the execution of this
Agreement are maintained in accordance with sound business practices and
accurately and completely reflect in all material respects all information
relating to its business; the nature, acquisition, maintenance, location and
collection of its assets; and the nature of all transactions giving rise to its
obligations or accounts receivable. The minutes and minute books of the Company
provided to the Investors prior to the date hereof constitute a true, complete
and correct copy of the entire minutes and minute books of the Company and
contain a true and complete record of all actions taken at all meetings and by
all written consents in lieu of meetings of stockholders, the boards of
directors and committees of the board of directors of the Company and the
Subsidiary. Neither the Company nor any Subsidiary has any of its books and
records recorded, stored, maintained or operated or otherwise wholly or partly
dependent upon or held by any means which are not under the exclusive ownership
and direct control of the Company or the Subsidiary.
2.18 Environmental Matters. The business, assets and properties
of the Company are and have been operated and maintained in compliance with all
applicable federal, state, city, county and local environmental protection laws
and regulations and occupational health and safety laws and regulations
(collectively, the "Environmental Laws"). No event has occurred which, with or
without the passage of time or the giving of notice, or both, would constitute a
non-compliance by the Company with, or a violation by the Company of, the
Environmental Laws. Neither the Company nor any of its predecessor companies has
caused or permitted to exist, as a result of an intentional or unintentional act
or omission, a disposal, discharge or release of solid wastes, pollutants or
hazardous substances, on or from any site which currently is or formerly was
owned, leased, occupied or used by the Company or any predecessor company,
except where such disposal, discharge or release was in compliance with the
Environmental Laws. No material expenditures are or will be necessary for the
Company to comply with any such existing Environmental Laws. No Order has been
issued, no claim of any kind under any Environmental Law has been filed, no
penalty has been assessed and no investigation or review is pending or, to the
knowledge of the Company
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or the Subsidiary, threatened by any Governmental Authority with respect to any
generation, treatment, storage, recycling, transportation, discharge, disposal
or release of any hazardous material (as the same is or may be defined under any
Environmental Law) generated by the Company or any Subsidiary, and to the
knowledge of the Company or the Subsidiary, there are no facts or circumstances
in existence which could reasonably be expected to form the basis for any such
Order, or claim of any kind under any Environmental Law, penalty or
investigation. Neither the Company nor any Subsidiary nor any prior owner or
lessee of any property now or previously owned or leased by either the Company
or any Subsidiary has transported or arranged for the transportation of any
hazardous material (as the same is or may be defined under any Environmental
Law) to any location that is (i) listed on the NPL under CERCLA, (ii) listed for
possible inclusion on the NPL by the Environmental Protection Agency in CERCLIS
or on any similar state or local list or (iii) the subject of enforcement
actions by federal, state or local Governmental Authorities that may lead to
claims of any kind under any Environmental Law against the Company or any
Subsidiary. No hazardous material (as the same is or may be defined under any
Environmental Law) generated by the Company or any Subsidiary or any prior owner
or lessee of any property now or previously owned or leased by either the
Company or any Subsidiary has been recycled, treated, stored, disposed of or
released by the Company or any Subsidiary at any location. There have been no
environmental investigations, studies, audits, tests, reviews or other analyses
conducted by, or that are in the possession of, the Company or any Subsidiary in
relation to any site or facility now or previously owned, operated or leased by
the Company or any Subsidiary which have not been delivered to the Investors
prior to the execution of this Agreement. The Company and the Subsidiary have
obtained all Licenses which are required of its respective business, operations
or assets and properties under applicable Environmental Laws.
2.19 Transactions with Affiliates. The Company has not had any
direct or indirect dealings with any Principal Owner of the Company or with any
of his Affiliates, associates (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) or relatives (or Affiliates
thereof) nor does either the Company nor the Subsidiary beneficially own,
directly or indirectly, any investment assets of any such current or former
Principal Owner of either the Company or the Subsidiary or any of their
respective Affiliates, associates or relatives (or Affiliates thereof). The
Company does not have any obligation to or claim against any Principal Owner of
the Company, or any of his or its Affiliates, associates or relatives, and no
such Person has any obligation to or claim against the Company. All products,
services or benefits provided to the Company by any such Person, or provided by
the Company to any such Person, are set forth on Part 2.19 of Schedule 1 and are
provided at a charge equal to the fair market value of such products, services
or benefits. To the best knowledge of the Company, no Principal Owner of the
Company, nor any of its Affiliates, associates or relatives, has any direct or
indirect interest of any kind in any business or entity which is competitive
with the Company or with which the Company has a business relationship.
2.20 Registration Rights. Except as provided in the Registration
Rights Agree ment, no Person has, and as of the Closing no Person shall have,
demand, "piggy-back," or other rights to cause the Company to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") relating to any securities of the Company.
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2.21 No Brokers or Finders. Neither the Company nor the
Subsidiary nor any of their respective Affiliates (nor any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the Company or the Subsidiary or any such Affiliate)
(i) has entered into any agreement that conflicts with any of the transactions
contemplated by this Agreement or any of the Company Documents, or (ii) has
entered into any agreement or had any discussions with any third party regarding
any transaction involving the Company or the Subsidiary which could result in
any Investor or its general partner or any limited partner or any officer,
director, manager, employee, agent or Affiliate of any of them being subject to
any claim for liability to said third party as a result of entering into this
Agreement or the Company Documents or consummating the transactions contemplated
hereby or thereby. No agent, broker, finder, investment banker, financial
advisor or other similar Person will be entitled to any fee, commission or other
compensation in connection with any of the transactions contemplated by this
Agreement or the Company Documents on the basis of any act or statement made or
alleged to have been made by the Company or the Subsidiary, any of their
respective Affiliates, or any investment banker, financial advisor, attorney,
accountant or other Person retained by or acting for or on behalf of the Company
or the Subsidiary or any such Affiliate.
2.22 Investment Company Act. The Company is not an "investment
company" nor is the Company directly or indirectly controlled by or acting on
behalf of any Person which is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
2.23 Disclosure. In connection with the purchase of the
Securities by the Investors as contemplated hereby, the Company has disclosed to
the Investors all material facts and information known to the Company concerning
the Company, its Condition and the Securities, and in this Agreement or
otherwise has not made any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements contained
herein or in any other Company Documents not misleading.
2.24 Simultaneous Merger. Immediately prior to the Closing each
of Petry and Advercomm were merged with and into the Subsidiary (the "Merger").
Upon consummation of the Merger, each shareholder of Petry and Advercomm
received Common Shares upon surrender of all shares of Petry and Advercomm
capital stock held by such shareholder. All agreements between Petry and
Advercomm and/or any of the shareholders of Petry and Advercomm have been
terminated and are of no further force or effect. All representations and
warranties in this Article 2 give effect to the consummation of the Merger. All
third party and Governmental Authority consents, notices and filings needed to
effectuate the Merger or prevent any breach (with or without notice, lapse of
time or both) have been obtained or made and are in full force and effect. The
representations and warranties of the Company, the Subsidiary, Petry and
Advercomm set forth in the Agreement and Plan of Merger dated February 2, 1998,
together with the Schedules of Exceptions thereto, are incorporated herein by
reference, shall be deemed to be representations and warranties to the Investors
hereunder and shall survive the Merger and Closing hereunder, without giving
effect to any provisions limiting or terminating survival thereunder.
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2.25 Public Announcements. Except as otherwise required by law or
by the rules of (or any agreement of the parties or their affiliates with) any
stock exchange, the Company agrees that there will prior to the Closing be no
press releases or other statements with respect to this Agreement or the
transactions contemplated hereby and that it will consult with the Investors
before issuing any press release or otherwise making any public statement with
respect to this Agreement and the transactions contemplated hereby and that
neither the Company nor the Investors shall issue any such press release or make
any such public statement prior to such consultation.
2.26 Proprietary Information and Employee Issues. The Company,
after reasonable investigation, is not aware that any of its employees, officers
or consultants are in violation of the form of Non-Disclosure and Developments
Agreement in the form attached hereto as Exhibit K, and the Company will use its
best efforts to prevent any such violation. The Company is not aware that any of
its employees is obligated under any Contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or Order of any court or Governmental Authority, that would interfere
with the use of his or her best efforts to promote the interests of the Company
or that would conflict with the Company's business as proposed to be conducted.
Neither the execution nor delivery of the Company Documents, nor the carrying on
of the Company business by the employees or consultants to the Company or the
Subsidiary, nor the conduct of the Company's or the Subsidiary's business as
proposed, will, to the best of the Company's knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any Contract, covenant or instrument under which any of such employees or
consultants is now obligated. The Company does not believe it is or will be
necessary for it or the Subsidiary to utilize any inventions of any of its or
the Subsidiary's employees or consultants (or people it or the Subsidiary
currently intends to hire or engage) made prior to their employment by the
Company or the Subsidiary.
2.27 Business Plan. The Business Plan has been prepared in good
faith by the Company and does not contain any untrue statement of a material
fact nor does it omit to state a material fact necessary to make the statements
made therein not misleading, except that with respect to projections contained
in the Business Plan, the Company represents only that such projections were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such projections.
2.28 Real Property Holding Company. The Company and the
Subsidiary are not real property holding companies within the meaning of Section
897 of the Code.
2.29 Substantial Customers. Part 2.29(a) of Schedule 1 lists the
fifteen (15) largest customers of the Company and the Subsidiary on the basis of
revenues for goods sold or services provided for the most recent fiscal year.
Except as disclosed in Part 2.29(b) of Schedule 1, no such customer or supplier
has ceased or materially reduced its purchases from or sales or provision of
services to the Company and the Subsidiary since October 1, 1997 or, to the
knowledge of the Company and the Subsidiary, has threatened to cease or
materially reduce such purchases or sales or provision of services after the
date hereof. Except as disclosed in Part 2.29(c) of Schedule 1 to the knowledge
of the Company and the Subsidiary, no such customer or supplier is threatened
with bankruptcy or insolvency.
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2.30 Accounts Receivable. Except as set forth in Part 2.30 of
Schedule 1, the accounts and notes receivable of the Company and the Subsidiary
reflected on the balance sheet included in the Financial Statements for the
period ended December 31, 1996, the Interim Financial Statements, and the Other
Financial Information, and all accounts and notes receivable arising subsequent
to December 31, 1996, (i) arose from bona fide sales transactions in the
ordinary course of business consistent with past practice and are payable on
ordinary trade terms, (ii) are legal, valid and binding obligations of the
respective debtors enforceable in accordance with their respective terms, (iii)
are not subject to any valid set-off or counterclaim, (iv) do not represent
obligations for goods sold on consignment, on approval or on a sale-or-return
basis or subject to any other repurchase or return arrangement, (v) are
collectible in the ordinary course of business consistent with past practice in
the aggregate recorded amounts thereof, net of any applicable reserve reflected
in the balance sheet included in Financial Statements for the period ended
December 31, 1996, the Interim Financial Statements and the Other Financial
Information, and (vi) are not the subject of any Actions or Proceedings brought
by or on behalf of the Company or the Subsidiary. Part 2.30 of Schedule 1 sets
forth a description of any security arrangements and collateral securing the
repayment or other satisfaction of receivables of the Company and the
Subsidiary. All steps necessary to render all such security arrangements legal,
valid, binding and enforceable, and to give and maintain for the Company and the
Subsidiary a perfected security interest in the related collateral, have been
taken.
2.31 Small Business Matters. The Company and the Subsidiary
acknowledge that they are aware that Prospect Street NYC Discovery Fund, L.P. is
a Federal Licensee under the Small Business Act of 1953, as amended, and the
Small Business Investment Act of 1958, as amended (collectively, the "SBA Act").
The Company, together with their respective "affiliates" (as that term is
defined in 13 CFR, ss.121.103, such term to have such meaning throughout this
section), is a "Small Business" within the meaning of the rules and regulations
of the U.S. Small Business Administration (the "SBA") promulgated under the SBA
Act (13 CFR 107 et seq.; and 13 CFR 121 et seq., collectively the "SBA
Regulations"), including 13 CFR ss.121.301. The information regarding the
Company and their respective affiliates set forth in SBA Form 480, Form 652 and
Section A of Form 1031 is accurate and complete. Copies of such forms shall have
been completed by the Company and delivered to Prospect Street NYC Discovery
Fund, L.P. at the Closing. The Company and the Subsidiary do not presently
engage in, and shall not hereafter engage in, any activities for which a Small
Business Investment Company licensed by the SBA under Section 301(c) of the
Small Business Investment Act of 1958, as amended (an "SBIC") is prohibited from
providing funds by SBA Regulations, including 13 CFR ss.107.720. The Company and
the Subsidiary have not received any "Financing" (as defined in the SBA
Regulations) from any SBIC.
2.32 Exemption from Registration; Restrictions on Offer and Sale
of Same or Similar Securities. Assuming the representations and warranties of
the Investors set forth in Sections 3.3, 3.4, and 3.6 hereof are true and
correct in all material respects, the offer and sale to the Investors of the
Securities is exempt from the registration requirements of the Securities Act.
Neither the Company nor the Subsidiary nor any Person authorized to act on
behalf of the Company or the Subsidiary has, in connection with the offer and
sale of the Securities engaged in (A) any form of general solicitation or
general advertising (as those terms are used within the meaning of Rule 501(c)
under the Securities Act), (B) any action involving a public offering within the
meaning
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of section 4(2) of the Securities Act, or (C) any action that would require the
registration under the Securities Act of the offering and sale of the Securities
pursuant to this Agreement and the Company Documents or that would violate
applicable state securities or "blue sky" laws. Neither the Company nor the
Subsidiary has made and will not prior to the Closing make, directly or
indirectly, any offer or sale of the Securities or of securities of the same or
a similar class as the Securities if as a result thereof the Securities could
fail to be entitled to exemption from the registration requirements of the
Securities Act. As used herein, the terms "offer" and "sale" have the meanings
specified in Section 2(3) of the Securities Act.
2.33 Series B Shares. The Series B Shares shall have the powers,
rights, preferences and privileges set forth in the Restated Certificate.
3. Representations, Warranties, and Covenants of the Investors. Each
Investor, severally and not jointly, hereby represents and warrants, in each
case with respect to itself and not with respect to any other Investor, to the
Company as follows:
3.1 Organization. If such Investor is a legal entity, such
Investor is, and as of the Closing will be, duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization.
3.2 Authorization. Such Investor has, and as of the Closing will
have, all requisite power and authority to execute, deliver and perform this
Agreement, the Shareholders' Agreement and the Registration Rights Agreement and
to consummate the transactions of such Investor contemplated hereby and thereby.
The execution, delivery and performance of this Agreement, the Shareholders'
Agreement and the Registration Rights Agreement, and the consummation by such
Investor of the transactions contemplated hereby and thereby, have been duly and
validly authorized by all necessary action on the part of such Investor. This
Agreement, the Shareholders' Agreement and the Registration Rights Agreement
have been duly executed and delivered by such Investor and constitutes its
legal, valid and binding obligation, enforceable against such Investor in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency or other similar laws affecting the enforceability of
creditors' rights in general or by general principles of equity.
3.3 Offering Exemption. Such Investor understands that the
Securities of the Company being purchased hereunder have not been registered
under the Securities Act, nor qualified under any foreign or state securities
laws, and that they are being offered and sold pursuant to an exemption from
such registration and qualification based in part upon the representations of
such Investor contained herein.
3.4 Knowledge and Experience; Ability to Bear Economic Risks.
Such Investor has such knowledge and experience in financial and business
matters such that it is capable of evaluating the merits and risks of the
investment contemplated by this Agreement and such Investor is able to bear the
economic risk of its investment in the Company (including a complete loss of its
investment). Such Investor represents it is an "accredited investor" as that
term is defined in Regulation D promulgated under the Securities Act. During
negotiation of the transactions
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contemplated herein, such Investor and its representative have been afforded
full and free access to corporate books, financial statements, records,
contracts, documents and other information concerning the Company and have been
afforded the opportunity to ask questions of the Company's officers and
directors concerning the Company's business, operations, financial condition,
assets and liabilities and other relevant matters as they have deemed necessary
or desirable and each Investor believes that it has been provided with all such
information as has been requested. The foregoing does not limit or modify the
representations or warranties made by the Company in Article 2 hereof or the
right of the Investors to rely thereon.
3.5 Limitations on Disposition. Such Investor recognizes that no
public market exists for the Securities of the Company to be sold hereunder, and
no representation has been made to such Investor that any such public market
will exist in the future. Such Investor understands that it must bear the
economic risk of this investment indefinitely unless the Company's Securities
are registered pursuant to the Securities Act or an exemption from such
registration is available, and unless the disposition of such Securities is
qualified under applicable state or foreign securities laws or an exemption from
such qualification is available, and that, except as provided in this Agreement
or the Registration Rights Agreement, the Company has no obligation or present
intention of so registering the Securities. Such Investor understands that there
is no assurance that any exemption from the Securities Act will be available,
or, if available, that such exemption will allow it to dispose of or otherwise
transfer any or all of its Securities, in the amounts or at the times any such
Investor might desire. Such Investor understands that at the present time Rule
144 (other than Rule 144(k)) promulgated under the Securities Act by the
Securities and Exchange Commission ("Rule 144") is not applicable to sales of
any such Securities because such Securities are not registered under Section 12
of the Exchange Act, and there is not publicly available the information
concerning the Company specified in Rule 144. Such Investor acknowledges that
the Company is not presently under any obligation to register under Section 12
of the Exchange Act or to make publicly available the information specified in
Rule 144 and that it may never be required to do so, except in each case to the
extent provided herein or in the Registration Rights Agreement.
3.6 No Intended Resale. Such Investor is acquiring the Securities
of the Company purchased hereunder for its own account for investment and not
with a view towards the resale, transfer or distribution thereof, nor with any
present intention of distributing such Securities, in each case in violation of
the Securities Act. Such Investor has not agreed to give any Person any interest
or right in the Securities. The Securities are being acquired by such Investor
for investment for its own account and not with a view to the resale or
distribution thereof in violation of applicable securities laws.
3.7 Legends.
(a) Such Investor understands that the certificates evidencing
the Securities will bear the following legends:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH
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SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT OR SUCH LAWS AND THE RULES AND REGULATIONS THEREUNDER."
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED BY AN AGREEMENT, DATED FEBRUARY 25,
1998, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE
CORPORATION. ANY PURPORTED TRANSFER IN VIOLATION OF THIS
AGREEMENT IS VOID AND WILL NOT BE RECOGNIZED BY THE CORPORATION
OR ITS TRANSFER AGENT."
(b) The Securities shall not be required to bear such legends if
an opinion of counsel reasonably satisfactory to the Company is delivered to the
Company to the effect that neither the legends nor the restrictions on transfer
contained in this Agreement are required to insure compliance with the Act.
Whenever, pursuant to the preceding sentence, any certificate for any of the
Securities is no longer required to bear the foregoing legend, the Company may,
and if requested by the holder thereof, shall, issue to the holder, at the
Company's expense, a new certificate not bearing the foregoing legends.
(c) Any and all Common Shares issued prior to January 31, 1999 or
which the Company is obligated to issue as a result of events occurring prior to
such date, in each case upon conversion of Series B Shares as a result of
accrued dividends with respect to such Series B Shares shall be cancelled and
cease to exist without further action by the Company or any other person upon
the closing of a Qualified Public Offering (as defined in Section 6.4(f)) prior
to January 31, 1999, and shall bear a legend to such effect.
3.8 Confidentiality. Such Investor agrees to maintain, and to
cause its agents and representatives to maintain, procedures reasonably designed
to preserve the confidentiality of the terms and conditions of this Agreement
and the Related Agreements (as defined in 4.10 below) and all documents or
information executed and/or delivered in connection with the transactions
contemplated by this Agreement and the Related Agreements (whether furnished
before, on or after the date hereof) and to use such information and documents
only in connection with evaluating and/or monitoring the Investors' investment
in the Company. The provisions of this subsection shall not apply to information
or to particular conditions or terms of the above referenced documents (i) if
the party seeking to make such disclosure shall have obtained the prior written
consent of the other party to the disclosure of such information, conditions or
terms, (ii) that are required to be disclosed during the course of any
litigation or arbitration which may be brought by any party related to the
provisions of any of the above referenced documents, (iii) that are or become
generally available to the public other than as a result of actions taken by the
party seeking to make such disclosure or its agents and representatives in
violation of this Agreement, (iv) that are required to be disclosed pursuant to
and in accordance with any law, rule or regulation applicable to the party
seeking to make such disclosure, (v) if such information becomes available to
the Investor from another source which the Investor reasonably believes is
entitled to disclose it, (vi) if such information was known by Investor on a
non-confidential basis prior to disclosure by the Company or one of its
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representatives, (vii) that are disclosed to the Investors' directors, officers,
employees and agents, and representatives of the Investors' advisors who need to
know the information for the purpose of evaluating a possible transaction and
who agree to keep the information confidential, (viii) that are reasonably
necessary to be disclosed in connection with any transfer of securities or (ix)
in connection with a disclosure to any shareholder or any direct or indirect
officers, directors, employees, members, managers, partners, Affiliates or
associates of such Investor.
Notwithstanding the foregoing, if a party is requested or
required (by oral questions, interrogatories, requests for information or
document subpoena, arbitration, civil investigative demand or similar process)
to disclose any of the above-referenced information or documents, such party
will promptly notify the other party of such request so that such other party
may seek an appropriate protective order or waive compliance with the provisions
hereof. If, in the absence of a protective order or the receipt of a waiver
hereunder, a party is nonetheless, in the opinion of its counsel, legally
required to disclose any terms or conditions of the above-referenced information
or documents to any tribunal, such party may disclose such information to such
tribunal without liability hereunder.
From and after the consummation of the Qualified Public Offering,
if any, of the Company's securities, to the extent that any of the information
furnished pursuant to Section 6.1 hereof would constitute material, nonpublic
information for purposes of the Securities Exchange Act of 1934, as amended,
such Investor covenants that it will not engage in any purchase or sale of the
Securities while in possession of such information and prior to the time that
such information is made generally known to the public and that such Investor
shall inform its agents and representatives, who have been given access to such
material, nonpublic information, of such requirements. The obligations in this
Section 3.8 shall survive termination of this Agreement.
3.9 Public Announcements. Except as otherwise required by law or
by the applicable rules of (or any agreement of the parties or their affiliates
with) the SEC, any stock exchange or the Nasdaq Stock Market, the Investors
agree that there will prior to the Closing be no press releases or other
statements with respect to this Agreement or the transactions contemplated
hereby and that they will consult with the Company before issuing any press
release or otherwise making any public statement with respect to this Agreement
and the transactions contemplated hereby.
4. Conditions of Investors' Obligations at Closing. The obligation of
each Investor to purchase the Securities to be purchased by it at the Closing is
subject to the fulfillment to each such Investor's satisfaction, in its sole
discretion, prior to or at the Closing, of each of the following conditions
(each of which may be waived in whole or in part by each Investor in its sole
discretion):
4.1 Representations and Warranties. Each of the representations
and warranties made by the Company and the Subsidiary in this Agreement shall be
true and correct in all material respects (if not qualified by materiality) and
in all respects (if qualified by materiality) on and as of the date of the
Closing as though such representation or warranty was made on and as of the date
of the Closing, and any representation or warranty made as of a specified date
earlier than the date of
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the Closing shall also have been true and correct in all material respects on
and as of such earlier date.
4.2 Performance. The Company and the Subsidiary shall have
performed and complied with all agreements, covenants, and conditions required
by this Agreement and the other Company Documents to be performed or complied
with by it prior to or at the Closing.
4.3 Stock Certificates, Etc. At the Closing, the Company shall
have tendered to each Investor certificates representing the Shares, in genuine
and unaltered form, duly endorsed in blank, with requisite stock transfer tax
stamps, if any, attached as well as the Warrants, in accordance with Sections
1.1 and 1.3 hereof, all in form and substance satisfactory to such Investor and
sufficient to transfer to and vest in such Investor good and valid title to the
Shares and the Warrants, free and clear of any Lien.
4.4 No Material Adverse Change. There shall not have occurred any
material adverse change in the Condition of the Company or the Subsidiary.
4.5 Consents. The Company shall have obtained all consents,
approvals or waivers from Governmental Authorities and third Persons (including,
without limitation, those with respect to Scheduled Contracts) necessary for the
execution, delivery and performance of this Agreement and the other Company
Documents and the transactions contemplated hereby and thereby, each of which
shall be in full force and effect, in form and substance satisfactory to each
Investor and shall not impose any limitations or restrictions on any Investor.
Without limiting the generality of the foregoing, each of the Company's existing
shareholders shall have waived any preemptive right, right of first offer and
any similar rights any such shareholder may have to purchase any of the
Securities.
4.6 No Litigation. There shall not be any Action of or before any
Governmental Authority or other Person pending or threatened with respect to
this Agreement, the other Company Documents or the transactions contemplated
hereby or thereby or which might materially adversely affect the Condition of
the Company or which could reasonably be expected to otherwise result in a
material diminution of the benefits of the transactions contemplated by this
Agreement or any of the Related Agreements (as defined below) to such Investor.
4.7 Opinion of Counsel. The Investors shall have received from
Proskauer Rose LLP, an opinion dated as of the Closing, in the form attached
hereto as Exhibit I.
4.8 Compliance Certificate. The Investors shall have received
certificates dated as of the day of the Closing executed by the Chief Executive
Officer of the Company certifying that the conditions specified in Sections 4.1,
4.2, 4.4 through 4.6, and 4.9 have been fulfilled.
4.9 Directors. Those persons listed on Schedule 3 hereto shall
have been duly elected and qualified as directors of the Company and at the
Closing shall constitute the entire Board of Directors of the Company.
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4.10 Related Agreements. The Company Documents and the
Non-Competition Agreements in the form attached hereto as Exhibit J
(collectively, the "Related Agreements") shall have been executed and delivered
by each of the parties thereto and shall be in full force and effect.
4.11 Proceedings and Documents. All proceedings in connection
with the transactions contemplated hereby and all documents and instruments
incident to such transactions shall be satisfactory in substance and form to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals or certified or other copies of such documents as the
Investors may reasonably request.
4.12 Secretary's Certificate. The Company shall have delivered to
the Investors a certificate of the Secretary of each of the Company and the
Subsidiary certifying as to (i) the Restated Certificate and the By-laws of each
of the Company and the Subsidiary as in effect as of the Closing; (ii) the
resolutions of the Board of Directors and, to the extent required, the
shareholders of the Company, authorizing and approving all matters in connection
with this Agreement, the Registration Rights Agreement, the Restated Certificate
and the Shareholders' Agreement, and the transactions contemplated hereby and
thereby; (iii) the duly elected officers of the Company and the incumbency of
such officers, and attaching a certificate as to the legal existence and good
standing of the Company issued by the Department of State of the State of New
York, and as to the legal existence and good standing of the Subsidiary issued
by the Secretary of State of the State of Delaware; and (iv) a certificate from
the Department of State or other appropriate official in each jurisdiction in
which each of the Company and the Subsidiary are qualified or admitted to do
business to the effect that each of the Company and the Subsidiary are duly
qualified or admitted and in good standing in such jurisdiction.
4.13 Qualification of Securities. The Company shall have caused
the Securities to be registered or qualified under applicable blue sky laws of
such jurisdictions in the United States as shall be reasonably required to
comply with all applicable laws in connection with the transactions contemplated
hereby.
4.14 Filing of Restated Certificate. The Restated Certificate
shall have been filed with and accepted by the Department of State of the State
of New York.
4.15 Purchase By Other Investors. Each Investor shall have
purchased and paid for the Securities to be purchased by it in accordance with
this Agreement.
4.16 Payment of Investor Expenses. The Company shall have paid
the expenses of the Investors in accordance with Section 7.1 hereof.
If at the Closing the Company fails to tender to the Investors
the documents specified herein which are required to be delivered to the
Investors at the Closing or if at the Closing any of the conditions specified in
this Section 4 shall not have been fulfilled to each Investor's satisfaction,
such Investor shall, at its election, be relieved of all further obligations
under this Agreement except those set forth in Section 3.8.
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5. Conditions of the Company's Obligations at Closing. The obligations
of the Company to each Investor under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
each of which may be waived in whole or in part by the Company in its sole
discretion:
5.1 Representations and Warranties. The representations and
warranties of such Investor contained in this Agreement shall be true and
correct in all material respects on and as of the date of the Closing as if made
on and as of such date.
5.2 Payment of Purchase Price. Such Investor shall have delivered
to the Company the purchase price specified in Section 1.1 hereof.
5.3 No Litigation. There shall not be any Action of or before any
Governmental Authority or other Person pending or threatened with respect to
this Agreement or the transactions contemplated hereby.
5.4 Proceedings and Documents. All proceedings in connection with
the transactions contemplated hereby and all documents and instruments incident
to such transactions shall be reasonably satisfactory in substance and form to
the Company and its counsel, and the Company shall have received all such
counterpart originals or certified or other copies of such documents as it may
reasonably request.
If at the Closing an Investor fails to tender to the Company the
payment or documents specified herein which are required to be delivered to the
Company at the Closing by such Investor or if at the Closing any of the
conditions with respect to an Investor specified in this Section 5 shall not
have been fulfilled to the Company's satisfaction, provided the Company is not
in breach hereunder, the Company shall, at its election, be relieved of all
further obligations to such Investor under this Agreement.
6. Certain Covenants.
6.1 Financial and Business Information.
(a) Monthly and Quarterly Statements. The Company shall
deliver to each Investor, as soon as practicable, and in any event within 30
days after the close of each month of each fiscal year of the Company in the
case of monthly statements and 45 days after the close of each of the first
three fiscal quarters of each fiscal year of the Company in the case of
quarterly statements, true and complete copies of the consolidated balance
sheets, and the related consolidated statements of income, stockholders' equity
and cash flows of the Company and its Subsidiaries (which, for purposes of this
Article 6, shall include all affiliates controlled by the Company directly or
indirectly through one or more intermediaries including, without limitation, any
Person in which the Company, directly or indirectly, through a Subsidiary or
otherwise, beneficially owns more than fifty percent (50%) of either the equity
interest in, or the voting control of such Persons, whether or not existing on
the date hereof) as at the close of such month or quarter and covering
operations for such month or quarter, as the case may be, and the portion of the
Company's fiscal year ending on the last day
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of such month or quarter, setting forth in each case in comparative form the
figures for the comparable period of the previous fiscal year and accompanied by
a narrative description of the Company's business and results of operations for
such month or quarter. All such financial statements shall be prepared in
accordance with GAAP (except for the omission of normal year-end adjustments and
footnote disclosures) consistently applied throughout the periods involved,
shall be true and correct in all material respects and shall fairly present the
financial condition, income, changes in stockholders' equity and cash flow of
the Company on a consolidated basis, as applicable, as of the respective dates
thereof and for the respective periods covered thereby. Each financial statement
delivered by the Company pursuant to this Section 6.1(a) shall be certified by
the Company's chief executive officer, president, treasurer or chief financial
officer.
(b) Annual Statements. The Company shall deliver to each
Investor, as soon as practicable after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, true and complete copies of
the consolidated and consolidating balance sheets of the Company and its
Subsidiary at the end of such year and the consolidated and consolidating
statements of income, stockholders' equity and cash flows of the Company and its
Subsidiary for such year, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and accompanied
by an opinion thereon of a firm of independent certified public accountants of
recognized national standing selected by the Company and reasonably acceptable
to the Investors, which opinion shall state that such financial statements
fairly present the financial condition, income, changes in stockholders' equity
and cash flow of the Company and its Subsidiary on a consolidated basis, as
applicable, and have been prepared in accordance with GAAP and that the
examination of such accountants in connection with such financial statements has
been made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances. Each
financial statement delivered by the Company pursuant to this Section 6.1(b)
shall be certified by the Company's chief executive officer, president,
treasurer or chief financial officer.
(c) Certificate of No Default. Simultaneously with the
delivery of the Financial Statements referred to in Section 6.1(a) and (b), the
Company shall deliver to each Investor a certificate of the Company's Chief
Executive and Chief Financial Officer certifying that no default,
misrepresentation or breach or event which with notice or lapse of time or both
would become a default, misrepresentation or breach under any Scheduled Contract
or other material Contract, including without limitation under this Agreement or
any Company Document, has occurred or is continuing or if any such event has
occurred and is continuing a full description thereof.
(d) Audit Reports. The Company shall deliver to each
Investor, promptly upon receipt thereof, one copy of each other financial report
and internal control letter submitted to the Company by independent accountants
in connection with any annual, interim or special audit made by them of the
books of the Company and its Subsidiary, as applicable, as well as any responses
of the Company thereto.
(e) Other Reports. The Company shall deliver to each
Investor, promptly upon their becoming available, one copy of each financial
statement, report, notice or proxy
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statement sent by the Company to stockholders generally, of each financial
statement, report, notice or proxy statement sent by the Company or any of its
Subsidiaries to the SEC or any successor agency, if applicable, of each regular
or periodic report and any registration statement, prospectus or written
communication (other than transmittal letters) in respect thereof filed by the
Company or any of its Subsidiaries with, or received by such Person in
connection therewith from, any securities exchange or the SEC or any successor
agency, of any press release issued by the Company or any of its Subsidiaries,
and of any material of any nature whatsoever prepared by the SEC or any
successor agency thereto or any state blue sky or securities law commission
which relates to or affects in any way the Company or any of its Subsidiaries.
(f) Requested Information. The Company shall deliver to each
Investor, with reasonable promptness, such other documents, reports, data and
information as from time to time may be reasonably requested by such Investor.
(g) Economic Impact Information. As soon as practicable after
the end of each fiscal year (but in any event prior to January 31 of each year)
the Company shall deliver to Prospect Street NYC Discovery Fund, L.P. a written
assessment of the economic impact of Prospect Street NYC Discovery Fund, L.P.'s
investment in the Company, specifying the full-time equivalent jobs created or
retained in connection with the investment, the impact of such investment on the
business of the Company in terms of revenue and profits of the Company's
business and on Taxes paid by the Company and its employees.
(h) Update of Information. Within 120 days after the end of
each fiscal year, the Company will furnish Prospect Street NYC Discovery Fund,
L.P. with the following information certified by the Company's chief executive
officer, president, treasurer or chief financial officer: (i) information
reasonably requested by Prospect Street NYC Discovery Fund, L.P. to determine
the Company's continuing eligibility for "Financing" under and as defined in the
SBIC Regulations and (ii) a statement verifying the use of the proceeds received
by the Company from Prospect Street NYC Discovery Fund, L.P. hereunder
(including the intended use of any such unused proceeds as of the date of such
certification), until all of the proceeds received by the Company from Prospect
Street NYC Discovery Fund, L.P. hereunder have been used by the Company. The
Company will also notify Fund I (a) at least 15 days prior to taking any action
which would result in a change in the number of record holders of the Company's
voting stock from fewer than 50 to 50 or more or from 50 or more to fewer than
50 and (b) of any other action or occurrence which increased or decreased or
would increase or decrease the number of record holders of the Company's voting
stock from fewer than 50 to 50 or more or from 50 or more to fewer than 50, as
soon as practicable after the Company becomes aware that such other action or
occurrence has occurred or is proposed.
(i) Access. The Company shall permit, and shall cause its
Subsidiaries to permit, representatives designated by an any Investor, upon
reasonable prior notice to the Company and at the such Investor's expense, to
visit and inspect each of the Company's and its subsidiaries' properties, to
examine their respective corporate and financial records (and make copies
thereof or extracts therefrom), to discuss their respective affairs, finances
and accounts with the
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Company's and its subsidiaries' directors, officers, key employees and
accountants, all at such reasonable times as may be requested by such Investor.
(j) Other Information. The Company shall provide, from time
to time, such additional information regarding the Company or its Subsidiaries
as any Investor reasonably may request, including without limitation, any
information or reports required by reason of reporting or regulatory
requirements to which an Investor, its general partner (if applicable), or any
Person having an interest in such Investor is subject.
6.2 Exemption from Investment Company Act. The Company shall
conduct its business so that neither the Company nor any of its Subsidiaries
shall become an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
6.3 Accounting and Reserves. The Company shall, and the Company
shall cause each of its Subsidiaries to, maintain a standard and uniform system
of accounting and shall keep proper books and records and accounts in which
full, true and correct entries shall be made of its transactions, all in
accordance with generally accepted accounting principles applied on a consistent
basis through all periods, and shall set aside on such books for each fiscal
year all such proper reserves for depreciation, obsolescence, amortization, bad
debts and other purposes in connection with its operations as are required by
such principles so applied.
6.4 Rights to Purchase Additional Securities.
(a) The Company hereby grants to each Investor a right to
purchase up to such Investor's "pro rata share" (as hereinafter defined) of any
New Securities (as hereinafter defined) which the Company may, from time to
time, propose to sell and issue. A "pro rata share", for purposes hereof, is the
ratio that (x) the aggregate number of Common Shares held by such Investor and
its Affiliates as of such date (assuming the exercise, conversion or exchange of
all Options, Warrants or convertible securities held by such Investor upon
conversion of, including the Series B Shares and Warrants) bears to (y) the sum
of (i) the total number of Common Shares then outstanding as of such date and
(ii) the total number of such shares issuable upon exercise, conversion of
Series B Shares or exchange of all Options, Warrants and convertible securities
held by all Investors as of such date.
(b) Except as set forth below, "New Securities" shall mean
any shares of capital stock of the Company, including Common Shares and
preferred shares, whether now authorized or not, and rights, options, warrants
or any other agreements to purchase such shares of capital stock, and securities
of any type whatsoever. Notwithstanding the foregoing, New Securities does not
include: (i) securities issuable upon exercise or conversion of rights, options,
warrants or other securities which are outstanding as of the date hereof and set
forth on Schedule 1; (ii) securities offered to the public generally pursuant to
an underwritten public offering and an effective registration statement under
the Act; (iii) securities issued pursuant to the acquisition of another Person
by the Company which is not an Affiliate of the Company by means of a merger,
purchase of shares, purchase of substantially all of the assets or other
reorganization; (iv) up to 5,750,000 Common Share securities issued to
employees, officers and directors of, and consultants to, the
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Company, with the approval of the Board of Directors of the Company pursuant to
the Stock Incentive Plan; (v) stock issued pursuant to any rights or agreements
including, without limitation, convertible securities, options and warrants,
provided that the preemptive rights established hereby apply with respect to the
initial sale or grant by the Company of such rights or agreements; and (vi)
securities issued in connection with any strategic partnership or joint venture,
the primary purpose of which is not to raise equity capital.
(c) In the event the Company proposes to undertake an
issuance of New Securities, it shall give each Investor written notice of its
intention, describing the type of New Securities, and the price and general
terms upon which the Company proposes to issue the same. Each Investor shall
have twenty (20) business days from the date any such notice is given (the
"Preemption Period") to agree to purchase all or any part of its pro rata share
of such New Securities for the price and upon the general terms specified in the
notice, by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.
(d) If any Investor fails so to notify the Company, then all
rights of such Investor to purchase New Securities under the offer and notice in
question shall terminate. If any Investor elects not to purchase all of its pro
rata share of the New Securities or fails to notify the Company of its intent to
purchase such New Securities prior to the expiration of the Preemption Period,
the Company shall promptly notify the remaining Investors that such New
Securities are available for purchase by the remaining Investors, on a "pro rata
share" basis, in accordance herewith. In such event, each of the remaining
Investors shall have five (5) business days after receipt of such notice to
determine whether to purchase any of such New Securities.
(e) In the event the Investors have not in the aggregate
elected to purchase all of such New Securities which are being offered, the
Company shall have ninety (90) days from the date of expiration of the
Preemption Period to sell the New Securities not elected to be purchased by the
Investors at the price and upon general terms not materially no more favorable
to the third party purchaser(s) of such New Securities than specified in the
notice given by the Company. In the event the Company has not sold the New
Securities within such ninety (90) day period, the Company shall not thereafter
issue or sell any New Securities, without first offering such securities in the
manner provided above.
(f) The preemptive right granted under this Agreement shall
expire upon the consummation of Qualified Public Offering, which shall mean a
sale of Common Shares by the Company that satisfies each of the following
conditions: (i) the sale of the Common Shares is effected in an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, other than a registration relating solely to
a transaction under Rule 145 under such Act (or any successor thereto) or to an
employee benefit plan of the Company; (ii) such Common Shares upon issuance are
listed on the New York Stock Exchange or included for trading in the Nasdaq
National Market System; (iii) the offering price to the public is not less than
$1.904 per Common Share, adjusted for stock splits, stock dividends, other stock
combinations or other like events; and (iv) the sales of Common Shares results
in at least $20,000,000 of gross proceeds to the Company, or, when considered
together with all previous underwritten public
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offerings of the Company satisfying clauses (i), (ii) and (iii) above, at least
$30,000,000 of aggregate gross proceeds to the Company.