EXHIBIT 10.27
SECURED NOTE AND WARRANT PURCHASE AGREEMENT
This Secured Note and Warrant Purchase Agreement (the "Agreement"),
dated as of February 12, 2003, is entered into by and among ZHONE TECHNOLOGIES,
INC., a Delaware corporation (the "Company"), and the purchasers listed on the
schedule attached hereto as Exhibit "A" (individually a "Purchaser" and
collectively the "Purchasers").
RECITALS
WHEREAS, the Company wishes to borrow from the Purchasers up to
$30,000,000, and the Purchasers are willing to extend such loans to the Company
on the terms and subject to the conditions set forth herein, including the
condition that the Company issue to the Purchasers secured convertible
promissory notes and warrants to acquire specified securities of the Company, in
each case in the form attached hereto, and the Company is willing to agree to
such terms and conditions;
NOW, THEREFORE, IT IS AGREED THAT:
1. The Notes and Warrants.
(a) Issuance of Notes. On the terms and subject to the
conditions set forth herein, the Company shall issue and sell to the Purchasers,
and the Purchasers shall purchase from the Company, severally and not jointly,
Secured Convertible Promissory Notes in the form of Exhibit "B" hereto (the
"Notes"), up to an aggregate principal amount of $30,000,000.
(i) Initial Issuance. The initial issuance of Notes
shall be in an aggregate principal amount of $10,000,000 and shall be purchased
by the Purchasers within twelve (12) business days of the Company's written
request (the "Initial Issuance") subject to the conditions set forth herein.
(ii) Additional Issuances. At any time during the 12
months after the Initial Issuance, the Company may make a written request to the
Purchasers for the issuance and sale of additional Notes ("Additional
Issuances"); provided however, that any Additional Issuances shall require the
prior unanimous written approval of representatives of Purchasers affiliated
with New Enterprise Associates, Kohlberg Kravis Xxxxxxx & Co. and Texas Pacific
Group (the "Purchaser Representatives"). Unless otherwise approved in writing in
advance by the Purchaser Representatives, each Additional Issuance shall be
limited to $5,000,000 per calendar quarter. Subject to the foregoing and the
other conditions set forth herein, the closing of each Additional Issuance shall
be within ten business days of the Company's written request. Notwithstanding
the foregoing, the obligations of the Purchasers to purchase Notes in any
Additional Issuance shall terminate upon the occurrence of a Financing or Event
of Liquidation (as defined in the Note).
(iii) Allocation of Notes. Exhibit A sets forth the
total commitment of each Purchaser for the purchase of Notes. In connection with
the Initial Issuance and each Additional Issuance of Notes (each, an
"Issuance"), the principal amount to be purchased by each Purchaser shall be
calculated as the amount of the Issuance multiplied by a fraction, the numerator
of which shall be the amount of the total commitment of such Purchaser and the
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denominator of which shall be the total commitment of all Purchasers. Any
commitment made in this Agreement by the Purchasers to purchase Notes in any
Issuance is several and not joint and under no circumstances will any Purchaser
be obligated to purchase Notes with an aggregate principal amount in excess of
its respective total commitment.
(b) Issuance of the Warrants. In connection with each
Issuance, the Company shall issue to the Purchasers warrants in the form of
Exhibit "C" (the "Warrants"). If the principal amount of any Note remains
outstanding six months after the Issuance of such Note, the Company shall issue
an additional Warrant ("Second Tranche Warrant"); provided that the calculation
of the number of Warrant Shares (as defined in the Warrant) subject to purchase
under each Second Tranche Warrant shall be based on the outstanding principal
amount as of the six month anniversary of the date of Issuance rather than the
original principal amount of such Note.
(c) Delivery; Failure to Fund; Allocation.
(i) At the Initial Closing and each closing
thereafter (each a "Subsequent Closing", together with the Initial Closing, a
"Closing"), the Company shall deliver to each Purchaser advancing funds at such
Closing the respective Note to be purchased by such Purchaser against the
Company's receipt of the purchase price for such Note, together with the Warrant
that such Purchaser is to receive. The Company's agreements with each of the
Purchasers are separate agreements and the issuance of a Note and a Warrant to a
Purchaser is a transaction separate from the transactions with the other
Purchasers. The Closings shall take place at the offices of Xxxx Xxxx Xxxx &
Freidenrich, LLP, 000 Xxxxxxxx Xxxxxx, Xxxx Xxxx, XX 00000.
(ii) If any Purchaser fails to complete the purchase
of the Notes to be purchased at any Closing, such Purchaser shall have no
further rights as a secured party under this Agreement or any Purchase Document
(as defined herein), the Notes previously issued to such Purchaser shall be
convertible at the Company's option into Common Stock, as set forth in the Note,
and the rights to exercise any Warrants issued to such Purchaser shall terminate
and such Purchaser shall forfeit any right to receive additional Warrants.
(iii) In connection with the issuance of the Notes and
Warrants under this Agreement, the parties hereby agree that the purchase price
for such securities shall be allocated such that for each $1,000 invested, $950
shall be deemed the purchase price of the Notes, $30 shall be deemed the
purchase price of the first Warrant issued with respect thereto and $20 shall be
deemed the purchase price of the Second Tranche Warrant issued with respect
thereto. The parties acknowledge and agree that the foregoing allocations
represent an appropriate allocation of the purchase price and the Company agrees
to take no inconsistent position for purposes of any tax return or tax reporting
by the Company.
(d) Security Interest.
(i) Grant of Security Interest. To secure the
payment of all of the indebtedness under the Notes and the other Purchase
Documents and the performance of all the Company's obligations under the
Purchase Documents (the "Secured Obligations"), the Company hereby grants to the
Designated Purchaser (as defined below), on behalf of the
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Purchasers, a continuing security interest in all right, title and interest of
the Company in and to all of the following, whether now owned or hereafter
arising or acquired and wherever located (collectively, the "Collateral"): all
accounts; all inventory; all equipment; all deposit accounts; all general
intangibles (including without limitation all intellectual property); all
investment property; all other personal property; and any and all claims, rights
and interests in any of the above, and all guaranties and security for any of
the above, and all substitutions and replacements for, additions, accessions,
attachments, accessories, and improvements to, and proceeds (including proceeds
of any insurance policies, proceeds of proceeds and claims against third
parties) of, any and all of the above, and all the Company's books relating to
any and all of the above. Notwithstanding the foregoing, the security interest
granted herein does not extend to, and the term "Collateral" does not include,
the following: (A) the portion which exceeds 65% of the presently existing and
hereafter arising issued and outstanding shares of capital stock owned by the
Company of any foreign subsidiary which shares entitle the holder thereof to
vote for directors or to vote on any other matter; and (B) any license or rights
under any contract or rights as lessee of any equipment or software, to the
extent that (i) the grant of a security interest therein would be contrary to
applicable law, or (ii) such license or contract or lease prohibits the grant of
a security interest therein (but only to the extent such prohibition is
enforceable under applicable law).
(ii) Perfection of Security Interest. The Company
shall take all actions that the Designated Purchaser reasonably requests to
perfect, to continue the perfection of, and to otherwise give notice of, the
Lien granted to the Designated Purchaser hereunder.
(iii) Designated Purchaser. The Purchaser designated
from time to time by the Requisite Holders (the "Designated Purchaser") shall
have the power to take all actions that the Purchasers have under the Purchase
Documents and by law, including the power to exercise the Purchasers' rights and
remedies under the Purchase Documents and by law during the continuance of an
Event of Default. As of the Initial Closing, the Purchasers, by executing this
Agreement, designate Agility Capital, LLC (the "Initial Designated Purchaser")
as the Designated Purchaser. The Designated Purchaser may resign as "Designated
Purchaser" upon 45 days notice to the Purchasers. If Designated Purchaser
resigns under this Agreement, the Requisite Holders shall appoint a successor
Designated Purchaser. If no successor Designated Purchaser is appointed prior to
the effective date of the Designated Purchaser's resignation, the Designated
Purchaser may appoint a successor Designated Purchaser. Notwithstanding the
resignation of Designated Purchaser or any removal of Designated Purchaser by
the Purchasers, the rights of the Designated Purchaser so resigning or removed
to reimbursement and indemnification shall survive such resignation or removal.
As consideration for the Initial Designated Purchaser to act as
Designated Purchaser, Company hereby agrees to pay, on or prior to the Initial
Closing, to the Initial Designated Purchaser for its separate account, and not
for the account of any other Purchaser or any subsequent Designated Purchaser,
the fees in the amounts set forth in the side letter agreement dated of even
date herewith between the Company and the Initial Designated Purchaser.
Any provision to the contrary contained elsewhere in this Agreement or
in any other Purchase Document, Designated Purchaser shall not have any duties
or responsibilities, except those expressly set forth herein, nor shall
Designated Purchaser have or be deemed to have any
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fiduciary relationship with any Purchaser. Except as otherwise expressly
provided herein or in any other Purchase Document, Designated Purchaser shall
have and may use its sole discretion with respect to exercising or refraining
from exercising any discretionary rights or taking or refraining from taking any
actions that Designated Purchaser is expressly entitled to take hereunder or
thereunder.
Designated Purchaser is authorized to exercise all rights and remedies
of the Purchasers under this Agreement and the other Purchase Documents,
provided that, absent exigent circumstances where action is determined by
Designated Purchaser to be necessary to protect Collateral, the Designated
Purchaser shall not proceed to enforce the Purchasers' rights and remedies
against the Collateral or the Company by foreclosure, judicial action or the
like (each, an "Enforcement Action"), unless and until directed to do so by the
Requisite Holders. Any direction by the Requisite Holders to begin an
Enforcement Action shall state only that the Designated Purchaser shall begin
taking Enforcement Action, and shall not specify the manner in which any
Enforcement Action should proceed. Once the Designated Purchaser receives
direction from the Requisite Holders to commence an Enforcement Action, all
decisions as to how to proceed to enforce the Purchasers' rights and remedies,
including the methods and timing or proceeding, may be made by the Designated
Purchaser in its sole discretion, with or without such consultation with the
Purchasers as Designated Purchaser determines in its sole discretion.
Notwithstanding the foregoing, if the Designated Purchaser requests the consent
of the Purchasers as to taking any specific Enforcement Action or other action,
the Designated Purchaser may (i) rely upon the decision of the Requisite
Holders, (ii) in its discretion and without limiting any other indemnification
obligation of the Purchasers herein, refrain from taking such Enforcement Action
or other action, unless the Requisite Holders agree to indemnify Designated
Purchaser expressly with respect to the specific Enforcement Action or other
action proposed to be taken and (iii) in its discretion and without limiting any
indemnification obligation of the Purchasers herein, refrain from taking such
Enforcement Action or other action unless the Purchasers (other than the Initial
Designated Purchaser) deposit with Designated Purchaser an amount equal to the
reasonable estimate by Designated Purchaser of the costs and expenses to be
incurred in connection with such Enforcement Action or other action. In the
event of one or more foreclosure sales, Designated Purchaser shall have the
right to credit bid on behalf of all the Purchasers in respect of the Secured
Obligations.
Except through the Designated Purchaser, no Purchaser shall collect,
take possession of, foreclose upon, or exercise any rights or remedies with
respect to the Collateral or the Company, judicially or non-judicially, in order
to satisfy or collect any Secured Obligations or attempt to do any of the
foregoing.
If Collateral is acquired by the Designated Purchaser by foreclosure
sale or otherwise, at the option of the Designated Purchaser, title may be taken
in the name of the Designated Purchaser or in the name of a nominee designated
by the Designated Purchaser (a "Designated Purchaser Nominee"), in any case, for
the ratable benefit of the Purchasers subject to the terms of this Agreement.
Although the Designated Purchaser shall consult with the Purchasers as to the
general operation and disposition of any Collateral for which title has been
acquired through foreclosure or otherwise, the consent of the Purchasers shall
not be required for matters or decisions by the Designated Purchaser relating to
the management, operation, repair or disposition of the Collateral so required.
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The costs of repossession, sale, possession and management (including
any costs of holding any Collateral the title to which is acquired by the
Designated Purchaser or a Designated Purchaser Nominee on behalf of the
Purchasers), and distribution shall be borne, Jointly and Severally, by the
Purchasers (other than the Initial Designated Purchaser). The Purchasers (other
than the Initial Designated Purchaser), Jointly and Severally, shall reimburse
the Designated Purchaser for its share of all such costs promptly upon demand.
Without limiting any obligations of any Purchaser to reimburse the Designated
Purchaser as contained herein, if the Company fails to pay taxes, assessments,
insurance premiums, claims against the Collateral or any other amount required
to be paid by the Company pursuant to any of the Purchase Documents, the
Designated Purchaser may (but shall not be obligated to) advance amounts
necessary to pay the same, and the Purchasers (other than the Initial Designated
Purchaser), Jointly and Severally, agree to reimburse the Designated Purchaser
promptly upon demand for any such payments.
None of Designated Purchaser nor any of its officers, directors,
managers, members, employees or agents shall be liable for any action taken or
omitted by any of them under or in connection with this Agreement or any other
Transaction Document or the transactions contemplated hereby (except for its own
gross negligence or willful misconduct).
(iv) Power of Attorney. The Company appoints the
Designated Purchaser, and any officer, employee or agent of the Designated
Purchaser, with full power of substitution, as the Company's true and lawful
attorney in fact, effective during the continuance of an Event of Default, with
power, in its own name or in the name of the Company, (i) to endorse any notes,
checks, drafts, money orders, or other instruments of payment in respect of the
Collateral that may come into the Purchasers' possession, (ii) to sign and
endorse any drafts against debtors, assignments, verifications and notices in
connection with accounts, and other documents relating to Collateral, (iii) to
pay or discharge taxes or Liens at any time levied or placed on or threatened
against the Collateral, (iv) to demand, collect, issue receipt for, compromise,
settle and xxx for monies due in respect of the Collateral, (v) to notify
Persons obligated with respect to the Collateral to make payments directly to
the Designated Purchaser, and (vi) generally, to do, at the Designated
Purchaser's option and at the Company's expense, at any time, or from time to
time, all acts and things necessary to perfect the Designated Purchasers'
security interest in the Collateral and to effect the intent of this Agreement.
This power of attorney shall be irrevocable as long as any of the Secured
Obligations are outstanding.
(v) Exercise of Rights and Remedies. During the
continuance of an Event of Default, the Designated Purchaser, shall have the
right, itself or through any of its agents, with or without notice to the
Company (as provided below), as to any or all of the Collateral, by any
available judicial procedure, or without judicial process (provided, however,
that it is in compliance with the UCC), to exercise any and all rights afforded
to a secured party under the UCC or other applicable law. Without limiting the
generality of the foregoing, the Designated Purchaser shall have the right to
sell or otherwise dispose of all or any part of the Collateral, either at public
or private sale, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such terms and conditions, all as the
Designated Purchaser, in its sole discretion, may deem advisable, and it shall
have the right to purchase at any such sale on behalf of the Purchasers. The
Company agrees that a notice sent at least fifteen (15) days before the time of
any intended public sale or of the time after which any private sale or other
disposition of the Collateral is to be made shall be reasonable notice of such
sale or other
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disposition. The proceeds of any such sale, or other Collateral disposition
shall be applied, first to any unreimbursed costs, expenses and fees of the
Designated Purchaser until paid in full, second, to the expenses of retaking,
holding, storing, processing and preparing for sale, lease or other disposition,
and selling, leasing or otherwise disposing of the Collateral, and to the
Purchasers' reasonable attorneys' fees and legal expenses until paid in full,
and then to the Secured Obligations and to the payment of any other amounts
required by applicable law, after which the Purchasers shall account to the
Company for any surplus proceeds. If, upon the sale or other disposition of the
Collateral, the proceeds thereof are insufficient to pay all amounts to which
the Purchasers are legally entitled, the Company shall be liable for the
deficiency and the reasonable fees of any attorneys the Designated Purchaser
employs to collect such deficiency; provided, however, that the foregoing shall
not be deemed to require the Designated Purchaser to resort to or initiate
proceedings against the Collateral prior to the collection of any such
deficiency from the Company. To the extent permitted by applicable law, the
Company waives all claims, damages and demands against the Designated Purchaser
and the other Purchasers arising out of the retention or sale, lease or other
disposition of the Collateral or other exercise of the Purchasers' rights and
remedies with respect thereto. All of the Purchasers' rights and remedies with
respect to the Collateral, whether established hereby or by any other
agreements, instruments or documents at law or in equity shall be cumulative and
may be exercised singly or concurrently.
(vi) Company Waivers. To the extent permitted by law,
the Company covenants that it will not at any time insist upon or plead, or in
any manner whatever claim or take any benefit or advantage of, any stay or
extension law now or at any time hereafter in force, nor claim, take or insist
upon any benefit or advantage of or from any law now or hereafter in force
providing for the valuation or appraisal of the Collateral or any part thereof,
prior to any sale or sales thereof to be made pursuant to any provision herein
contained, or the decree, judgment or order of any court of competent
jurisdiction; or, after such sale or sales, claim or exercise any right under
any statute now or hereafter made or enacted by any state or otherwise to redeem
the property so sold or any part thereof, and, to the full extent legally
permitted, hereby expressly waives all benefit and advantage of any such law or
laws, and covenants that it will not invoke or utilize any such law or laws or
otherwise hinder, delay or impede the execution of any power herein granted and
delegated to the Purchasers, but will suffer and permit the execution of every
such power as though no such power, law or laws had been made or enacted.
(vii) Subordination. The Purchasers and the Company
agree that the Lien granted to the Designated Purchaser under this Agreement
shall be subordinate to Liens in favor of Silicon Valley Bank and CIT Technology
Financing Services, Inc., as set forth in, and authorizes Designated Purchaser
to enter into, the Intercreditor Agreement, dated of even date herewith and
attached to this Agreement as Exhibit D.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Purchasers that, as of the Initial Closing
and any subsequent Closing, except as otherwise stated to the contrary herein or
as set forth in the Schedule of Exceptions, as follows. For purposes of this
Section 2, the term "Subsidiary" and "Subsidiaries" shall include Premisys
Communications, Inc., CAG Technologies, Inc., Optaphone Systems, Inc., Vpacket
Communications, Inc., Xybridge Technologies, Inc., Zhone Merger Subsidiary I,
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Inc., Zhone Merger Subsidiary II, Inc., Zhone Technologies International, Inc.
and ZTI Merger Subsidiary, Inc., and for purposes of Section 2(a), (d) and (i)
only, shall also include Zhone Campus LLC.
(a) Organization and Standing; Subsidiaries. Each of the
Company and its Subsidiaries is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of its
respective state of incorporation and has all requisite corporate power and
authority to carry on its business as now conducted. The Company and each
Subsidiary is duly qualified to transact business and is in good standing in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on the business or properties of the Company. The Company has
made available to the Purchasers or Xxxxxx & Xxxxxxx true, correct and complete
copies of the Certificate of Incorporation, Bylaws and/or equivalent charter
documents of the Company and each Subsidiary each as amended to date. The
Company owns all of the issued and outstanding capital stock of each Subsidiary.
Except as provided on the Schedule of Exceptions: (i) no subscription, warrant,
option, convertible security or other right (contingent or otherwise) to
purchase or acquire any shares of capital stock of any Subsidiary is authorized
or outstanding; and (ii) the Subsidiary has no obligation (contingent or
otherwise) to issue any subscription, warranty option, convertible security or
other such right or to issue or distribute to holders of any shares of its
capital stock any evidences of indebtedness or assets of the Subsidiary.
(b) Corporate Power; Binding Obligations. The Company and
each Subsidiary has all requisite legal and corporate power to enter into,
execute and deliver each of the Purchase Documents. The Purchase Documents are
valid and binding obligations of the Company and each Subsidiary, enforceable in
accordance with their terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights and by general principles of equity.
(c) Authorization. All corporate and legal action on the
part of the Company and any Subsidiary, its respective officers, directors and
shareholders needed for the Company and the Subsidiaries to issue the Notes and
the Warrants and to perform its respective obligations hereunder and under the
other Purchase Documents have been taken or will be taken prior to the Initial
Closing. Except for the rights specifically contemplated by the transactions
described herein or pursuant to the Restated Rights Agreement, dated of even
date herewith (the "Rights Agreement"), no stockholder of the Company has any
right of first refusal or any preemptive rights with respect to the Notes or
Warrants or other Securities (as defined in Section 2(d) below).
(d) Compliance with Other Instruments. Neither the Company
nor any Subsidiary is in violation of its Certificate of Incorporation, Bylaws
or equivalent charter documents, as amended through the applicable Closing Date,
or in any material respect of any material mortgage, indenture, contract,
agreement, instrument, judgment, decree or any order, writ, decree, statute,
rule or regulation, by which the Company or any Subsidiary is bound or to which
the Company's or any Subsidiary's property is subject. The Company's and the
Subsidiary's execution, delivery, and performance of and compliance with the
Purchase Documents, and the Company's issuance and sale of the Notes and the
securities issuable upon conversion of the Notes (the "Conversion Shares"), the
Warrants and the securities issuable upon
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exercise of the Warrants (the "Exercise Shares", together with the Notes, the
Conversion Shares and the Warrants, and any securities issuable upon conversion
of the Conversion Shares and Exercise Shares collectively, the "Securities")
will not, with or without the passage of time or giving of notice, result in any
violation or default of or acceleration of performance of obligations due under
or creation of a lien under any term of (i) its Certificate of Incorporation (as
amended) or Bylaws, (ii) any provision of any mortgage, indenture, agreement,
instrument or contract to which it is party or by which it is bound or (iii) any
judgment, decree, order, writ or, to its knowledge, any statute, rule or
regulation applicable to the Company or the Subsidiaries, which in the case of
clauses (ii) and (iii) only would have a material adverse effect on the Company
or any Subsidiary. To the Company's knowledge, neither it nor any of the
Subsidiaries is in violation of any provision of federal, state or local
statute, rule or governmental regulation which would materially adversely affect
the business, properties or conditions (financial or otherwise) of the Company.
The Company and each Subsidiary has all franchises, permits, licenses, and any
similar authority necessary for the conduct of its business and is not in
default in any material respect under any of such franchises, permits, licenses,
and any similar authority.
(e) Government Consent. No consent, approval, order or
authorization of, or designation, registration, declaration or filing with, any
federal, state or other governmental authority on the Company's or any
Subsidiary's part is required in connection with the valid execution and
delivery of this Agreement, the Notes, the Warrants or other Purchase Documents
or the offer, sale or issuance of the Notes and the Warrants or other
Securities, except for (i) any notices of sales required to be filed with the
SEC under Regulation D of the Securities Act, or (ii) such post-closing filings
as may be required under applicable blue sky laws.
(f) Offering. In reliance on the Purchasers' representations
and warranties in Section 3, the offer, sale and issuance of the Notes and the
Warrants and the issuance of the other Securities will not result in a violation
of the requirements of Section 5 of the Securities Act or the qualification or
registration requirements of applicable blue sky laws as such laws exist as of
the Initial Closing.
(g) Capitalization. As of the date of this Agreement, the
Company's authorized capital stock consists of 135,000,000 shares of common
stock (the "Common Stock") and 113,500,000 shares of preferred stock (the
"Preferred Stock"). As of the date of this Agreement, (i) 15,523,593 shares of
Common Stock are issued and outstanding, (ii) 62,500,000 shares of the Preferred
Stock are designated as Series AA Preferred Stock, of which 62,500,000 are
issued and outstanding and (iii) 51,000,000 shares of the Preferred Stock are
designated as Series B Preferred Stock, of which 11,469,338 are issued and
outstanding. All such issued and outstanding shares have been duly authorized
and validly issued and are fully paid and nonassessable. As of January 31, 2003,
the Company has reserved 7,562,412 shares of Common Stock for issuance under the
Company's stock option plans, of which 3,740,813 shares were subject to
outstanding options and 2,177,939 shares were reserved for future option grants.
As of the date of this Agreement, there 27,500 shares of Company Common Stock
and 138,614 shares of Company Series B Preferred Stock reserved for issuance
upon the exercise of outstanding warrants.
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(h) Financial Statements. The Company has made available to
the Purchasers (a) its audited balance sheet, statement of income, loss and net
earnings, statement of shareholders equity and statement of cash flows for the
year ended December 31, 2001 and (b) its unaudited balance sheet as of December
31, 2002 (the "Statement Date") and its unaudited consolidated statement of
income and loss and net earnings as of the Statement Date (collectively, the
"Financial Statements"). The Financial Statements are true, complete and
correct, have been prepared in accordance with generally accepted accounting
principles on a consistent basis throughout the periods indicated, and present
fairly the financial condition of the Company and the Subsidiaries and the
results of their operations as of December 31, 2001, and as of the Statement
Date, subject to normal year-end audit adjustments, none of which, either
individually or in the aggregate, will be material. As of the date hereof,
except for liabilities arising out of the Loan and Security Agreement with
Silicon Valley Bank, dated as of December 30, 2002, neither the Company nor any
Subsidiary has any material liabilities, whether accrued, absolute, contingent
or otherwise not disclosed in the Financial Statements, except current
liabilities incurred in the ordinary course of business subsequent to the
Statement Date which have not been, either individually or in the aggregate,
material. The Company is not aware of any reasonable basis for the assertion
against the Company or any Subsidiary of any other debt, duty, liability,
obligation or loss contingency other than liabilities that are not and would not
be, individually or in the aggregate, material to the Company's or the
Subsidiary's business, properties or condition (financial or otherwise).
(i) Litigation. There is no claim, suit, litigation,
proceeding or investigation pending or, to best of the Company's knowledge,
threatened against or affecting the Company or any Subsidiary in any court or
before any governmental agency (or any basis therefor known to the Company)
which could reasonably be expected to result in a material adverse effect on the
Company.
(j) Title to Assets; Liens. The Company and each Subsidiary
have good and marketable title to its respective assets (other than assets or
rights leased or licensed to the Company), other than (i) Liens for taxes, fees,
assessments or other governmental charges or levies, either not delinquent or
being contested in good faith by appropriate proceedings; (ii) Liens (A) upon or
in any equipment and related software acquired or held by the Company or any
Subsidiary to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition of such equipment
and software and related soft-costs, or (B) existing on such equipment at the
time of its acquisition and the proceeds of such equipment and related software;
(iii) Liens consisting of leases or subleases and licenses and sublicenses
granted to others in the ordinary course of business and any interest or title
of a lessor or licensor under any lease or license, as applicable; (iv) Liens
securing claims or demands of materialmen, mechanics, carriers, warehousemen,
landlords and other like Persons imposed without action of such parties; (v)
Liens incurred or deposits made in the ordinary course of business in connection
with worker's compensation, unemployment insurance, social security and other
like laws; (vi) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not interfering in any material respect with the
ordinary conduct of business; (vii) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (viii) Liens arising from the Senior
Debt; and (ix) Liens arising out of this Agreement and the Purchase Documents.
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(k) Finder's Fees. The Company (a) represents and warrants
that neither it nor any Subsidiary has retained any finder or broker in
connection with the transactions contemplated by this Agreement and (b) hereby
agrees to indemnify and to hold each of the Purchasers harmless of and from any
liability for any commission or compensation in the nature of a finder's fee to
any broker or other person or firm (and the costs and expenses of defending
against such liability or asserted liability) for which the Company, any
Subsidiary or any of the Company's employees or representatives, are
responsible.
3. Purchaser Representations and Warranties. Each Purchaser,
severally and not jointly, represents and warrants to the Company as of each
Issuance as follows:
(a) Investment Intent; Authority. This Agreement is made
with Purchaser in reliance upon such Purchaser's representation to the Company,
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the applicable Note and Warrants for investment for its own account
for investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities Act
or California Law. Purchaser has the full right, power, authority and capacity
to enter into and perform this Agreement and this Agreement will constitute a
valid and binding obligation upon such Purchaser, except as the same may be
limited by bankruptcy, insolvency, moratorium, and other laws of general
application affecting the enforcement of creditors' rights.
(b) Shares Not Registered. Purchaser understands and
acknowledges that the offering of the Notes and the Warrants (or the other
Securities) pursuant to this Agreement will not be registered under the
Securities Act or qualified under applicable state law on the grounds that the
offering and sale of securities contemplated by this Agreement are exempt from
registration under the Securities Act and exempt from qualification pursuant to
applicable state securities law, and that the Company's reliance upon such
exemptions is predicated upon Purchaser's representations set forth in this
Agreement. Purchaser acknowledges and understands that resale of the Securities
may be restricted indefinitely unless they are subsequently registered under the
Securities Act and qualified under the applicable state securities law or an
exemption from such registration and such qualification is available.
(c) Knowledge and Experience. Purchaser (i) has sufficient
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the prospective investment in the Note and
Warrants, (ii) has the ability to bear the economic risks of such prospective
investment, (iii) has been furnished with and has had access to such information
as Purchaser has considered necessary to make a determination as to the purchase
of such Note and Warrant together with such additional information as is
necessary to verify the accuracy of the information supplied, (iv) has had all
questions which have been asked by Purchaser satisfactorily answered by the
Company, and (v) has not been offered any of the Notes or the Warrants by any
form of advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any such media.
Nothing in this Section 3 shall in any respect limit or modify the
representations and warranties of the Company made in Section 2, in any Purchase
Document or in any other instrument or writing delivered by the Company
hereunder or thereunder, or the right of the Purchaser to rely thereon.
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4. Purchaser Closing Conditions. Each Purchaser's obligation to
purchase the Note and Warrant in connection with each Issuance is subject to the
fulfillment, any of which may be waived with the consent of the Requisite
Holders with respect to all Purchasers (other than Section 4(l), which may only
be waived by the Initial Designated Purchaser):
(a) Representations and Warranties. The Company's
representations and warranties in Section 2 hereof shall be true and correct in
all material respects as of the date hereof and the Closing.
(b) Events of Default. No Event of Default shall exist and
no event shall have occurred which through the passage of time, service of
notice or both, would mature into an Event of Default.
(c) Waivers. The Company shall have obtained the requisite
approval of an amendment or waiver of its Certificate of Incorporation, as
amended (the "Certificate") and the Rights Agreement and any other applicable
investor rights agreement such that the issuance of the Notes and the Warrants
or other Securities (i) do not result in any adjustment of the conversion
provisions of the Certificate and (ii) are not subject to any right of first
refusal set forth in any such investor rights agreement.
(d) Other Agreements and Proceedings. The Company and each
Purchaser shall have executed and delivered this Agreement and other Purchase
Documents and all financing statements and instruments required thereunder, and
the Company will have executed and delivered to such Purchaser such Purchaser's
Note and Warrant. All corporate and other proceedings in connection with the
transactions contemplated by this Agreement and the Purchase Documents and all
documents and instruments incident to such transactions shall be satisfactory in
substance and form to the Requisite Holders and their counsel in their sole and
absolute discretion, and the Requisite Holders and their counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may request.
(e) Officer Certificate. The Chief Executive Officer of the
Company shall deliver to the Purchasers a certificate certifying that the
conditions set forth in subsections (a), (b) and (g) of this Section 4 have been
fulfilled.
(f) Rights Agreement Amendment. The Company and sufficient
other signatories shall have executed an amendment to the Rights Agreement
adding the Common Stock issuable in connection with the Notes and Warrants as
registrable securities thereunder.
(g) Material Adverse Change. There has been no material
adverse change in the business, properties or condition (financial or otherwise)
of the Company and the Subsidiaries, taken as a whole, since the date of the
Financial Statements.
(h) Secretary Certificate. The Secretary of the Company
shall deliver to the Purchasers a certificate certifying true, correct and
complete copies of (i) the Certificate of Incorporation currently in effect,
(ii) the Bylaws of the Company currently in effect, (iii) the resolutions of the
Board of Directors approving the terms of the Issuance and authorizing the
officers of the Company to negotiate, execute and deliver the Purchase Documents
(defined below) and approving the consummation of the transactions contemplated
therein (and a
11
representation by the Secretary that such resolutions and written consent have
not been modified, rescinded or superceded and remain in full force and effect),
and (iv) the resolutions of the requisite preferred stockholders of the Company
approving the amendment to the Company's Third Amended and Restated Certificate
of Incorporation and the terms of the Issuance (and a representation by the
Secretary that such resolutions have not been modified, rescinded or superceded
and remain in full force and effect).
(i) Senior Lender Consents. The Company shall have received
from each Senior Lender such consents, agreements and arrangements as are
acceptable to the Requisite Holders and as necessary for the Purchasers to
purchase the Notes on the terms and subject to the conditions set forth in the
Purchase Documents and to obtain a perfected security interest in the
Collateral.
(j) Minimum Commitment. Purchasers committing to purchase at
least $25,000,000 in principal amount of Notes shall have executed this
Agreement.
(k) Subsidiary Guaranty and Security Agreement. Each
Subsidiary shall have executed a Guaranty and Security Agreement in favor of the
Purchasers substantially in the form of Exhibit E attached to this Agreement.
(l) Initial Designated Purchaser. Solely as a condition to
the Initial Designated Purchaser's obligation to purchase the Note and Warrant
in connection with each Issuance, the Company shall have paid all fees then due
and owing to the Initial Designated Purchaser and shall have reimbursed the
Initial Designated Purchaser for all costs and expenses incurred by the Initial
Designated Purchaser in accordance with the terms hereof.
5. Company Closing Conditions. The Company's obligation to sell
(and issue) the Notes and the Warrants at the Closing is subject to the
fulfillment of the following conditions:
(a) the Purchasers' representations and warranties in
Section 3 hereof shall be true and correct in all material respects when made,
and shall be true and correct in all material respects as of each Closing; and
(b) the Purchasers shall have executed such subordination
agreements as requested or required by the holders of the Senior Debt.
6. Restrictions on Transferability of Securities; Compliance with
Securities Act.
(a) Restrictions on Transferability. None of the Securities
shall be sold, assigned, transferred or pledged except upon the conditions
specified in this section, which conditions are intended to ensure compliance
with the Securities Act. Each Purchaser will cause any proposed purchaser,
assignee, transferee, or pledgee of any of such Purchaser's Securities to agree
to take and hold such Securities subject to the provisions and upon the
conditions specified in this section.
(b) Restrictive Legend. Each certificate representing (i)
the Securities and (ii) any other securities issued in respect of the Securities
upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event (collectively the "Restricted Securities"),
12
shall (unless otherwise permitted by the provisions of this section) be stamped
or otherwise imprinted with a legend required under applicable state securities
laws and a legend substantially as follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
Each Purchaser consents to the Company making a notation on its records and
giving instructions to any transfer agent of the Securities in order to
implement the restrictions on transfer established in this section.
(c) Notice of Proposed Transfers. The holder of each
certificate representing Restricted Securities by acceptance thereof agrees to
comply in all respects with the provisions of this section. Prior to any
proposed sale, assignment, transfer or pledge of any Restricted Securities
(other than (i) a transfer not involving a change in beneficial ownership, or
(ii) in transactions involving the distribution without consideration of
Restricted Securities by any Purchaser to any of such Purchaser's partners,
retired partners, shareholders, subsidiaries or other affiliates or to the
estate of any of such Purchaser's partners, retired partners or shareholders),
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer or unless the Restricted Securities may be
transferred pursuant to Rule 144 or Rule 144A under the Securities Act, the
holder thereof shall give written notice to the Company of such holder's
intention to effect such transfer, manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied, at such holder's expense by either (a) an unqualified written
opinion of legal counsel reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (b) a "no
action" letter from the SEC to the effect that the transfer of such securities
without registration will not result in a recommendation by the SEC staff that
action be taken with respect thereto, whereupon the holder of such Restricted
Securities shall be entitled to transfer such Restricted Securities in
accordance with the terms of the notice delivered by the holder to the Company.
Each certificate evidencing the Restricted Securities transferred as above
provided shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in this section, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for such holder and the Company such legend is not required in order to
establish compliance with any provision of the Securities Act.
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7. Events of Default. Any one or more of the following events shall
constitute an Event of Default by the Company under this Agreement unless waived
by the Requisite Holders in their sole discretion:
(i) failure to pay any amount due under the Notes or the
other Purchase Documents;
(ii) failure to pay any amount due to the Initial Designated
Purchaser as set forth in Section 1(d)(iii) of this Agreement, which failure to
pay shall continue for more than 10 calendar days after written notice thereof;
(iii) the Company shall default in its performance of any
covenant made in this Agreement or other Purchase Document (other then the
obligation to make any payment of principal or interest under any Note or any
other payment obligation under any Purchase Document), or be in breach of, in
any material respect, any representation or warranty made in this Agreement,
which default or breach shall continue for more than 10 calendar days after
written notice thereof;
(iv) The Company shall default in the payment of any part of
the principal or accrued interest on any indebtedness for borrowed money (other
than that outstanding under the Notes), the aggregate outstanding principal
amount of which is $500,000 or more and which payment default continues after
the expiration of any applicable grace period following the date on which the
same shall become due and payable, whether at maturity or by acceleration or
otherwise ("Payment Default"); provided that any Event of Default under this
Section 7(iii) shall be deemed automatically cured if such Payment Default is
waived by the lender with respect thereto or if such Payment Default is cured by
the Company in a timely manner;
(v) A final judgment or judgments shall be entered against
the Company in an amount more than $1,000,000, which is not disputed, stayed or
covered by adequate indemnification or insurance, or the Company shall consent
to or enter into any settlement of, any material claim by or against the
Company, in excess of $1,000,000;
(vi) insolvency (however evidenced) of the Company or the
commission of any act of insolvency;
(vii) the making by the Company of a general assignment for
the benefit of creditors;
(viii) the filing of a voluntary petition for relief under the
United States Bankruptcy Code or commencement of the Company of a proceeding
under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization;
(ix) the filing of an involuntary petition for relief against
the Company under the United States Bankruptcy Code or commencement against the
Company of a proceeding under any other bankruptcy or insolvency law, seeking
reorganization, provided that none of the
14
foregoing shall constitute an Event of Default where such case proceeding,
action or event is dismissed or stayed within 60 days; and
(x) if the Company suspends the transaction of substantially
all of its business operations.
8. Remedies. The entire amount set forth under the Notes shall,
without protest of any kind, all of which are hereby expressly waived, be due
and payable immediately upon notice given by the Requisite Holders to the
Company after an Event of Default (except with respect to any of Section
7(v)-(viii) in which case the entire amount set forth under the Notes shall be
due and payable immediately upon the occurrence of such default without any
notice given by the Requisite Holders), and the holder of each Note may
thereafter enforce payment of all amounts due and owing under such Note and
exercise any and all other remedies granted to it at law, in equity, or
otherwise.
9. Further Covenants of the Company. For so long as any amount
remains outstanding under any Note (for purposes of the covenants set forth
herein, the "Company" shall refer to and include the Subsidiaries (not including
Zhone Campus LLC)):
(a) No Liens; Seniority. The Company shall not create,
assume or suffer to exist any Lien in or on any asset (including any portion of
the Collateral) of the Company, real or personal, tangible or intangible,
whether now owned or hereafter acquired, except for Permitted Liens. Except for
the indebtedness of the Senior Lenders, the indebtedness under the Notes shall
be senior in right of repayment to the extent permitted by applicable law, to
any other indebtedness of the Company.
(b) Indebtedness. Other than Permitted Indebtedness (defined
below), the Company shall not incur, create, assume or permit to exist,
contingently or otherwise, any indebtedness (including without limitation any
obligations for borrowed money, any obligations under capital leases or any
guarantees for any indebtedness or obligations for others). The Company shall
not agree to or seek to amend, restate, change, renegotiate, refinance or
otherwise modify the Loan and Security Agreement with Silicon Valley Bank, dated
December 30, 2002, if and to the extent that any such amendment, restatement,
change, renegotiation, refinancing or other modification would increase the
principal amount outstanding or the amount available thereunder, shorten the
maturity thereof, increase any interest rate payable thereon, or adversely
affect the Collateral or the interests of any Purchaser in the Collateral. As
used herein the term "Permitted Indebtedness" shall mean and refer to: (a) the
Notes issued hereunder; (b) indebtedness existing on the date hereof and shown
on the Schedule of Exceptions; (c) unsecured trade payables incurred in the
ordinary course of business and surety bonds required in connection with the
sale of the Company's products; (d) indebtedness secured by Permitted Liens; (e)
indebtedness with respect to capital leases in an amount not to exceed
$1,000,000; and (f) extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (e) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose materially more burdensome terms upon Company.
15
(c) No Sale or Purchase of Assets. The Company shall not
sell, lease, assign, transfer or otherwise dispose of, contingently or
otherwise, any assets, real or personal, tangible or intangible, whether now
owned or hereafter acquired, except for (a) transactions in the ordinary course
of its business and affecting such assets as are not material taken as a whole,
and (b) obsolete, worn out or replaced property not used or useful in the
Company's business, and in each of the foregoing cases, at fair market value.
The Company shall not purchase or acquire any assets or operations of any other
Person (whether by purchase or assets, purchase of securities, lease, joint
venture, merger, recapitalization or otherwise) if such assets or operations
would or would be intended to constitute a material portion of assets,
operations, costs or revenues of the Company.
(d) No Related Party Transactions. The Company shall not
consummate, engage in, approve, or consent to any transaction or transactions to
which the Company is a party and to which any employee, director, officer or
stockholder of the Company is a party, other than (i) payment of salaries,
bonuses and benefits to directors, officers, employees and consultants in the
ordinary course of business and consistent with past practice, (ii) payment of
travel and living expenses and reimbursement of expenses incurred by employees,
officers, directors, consultants or other persons performing services for the
Company or any subsidiary in the ordinary course of performing their assigned
duties on behalf of the Company or such subsidiary and consistent with past
practice; (iii) transactions approved by the Board of Directors in connection
with the issuance of equity at the then fair market value of such securities to
existing stockholders and respecting stock options and stock purchase rights
granted to employees, officers, directors, consultants or other persons
performing services for the Company or any subsidiary, including the granting of
such options or purchase rights, and repurchases of capital stock of the Company
upon the occurrence of certain events (such as the termination of service)
pursuant to agreements under which such options or purchase rights were granted;
(iv) the Financing; and (v) loans or investments in consolidated subsidiaries
from time to time in an amount sufficient to fund operating expenses.
(e) Liquidity Covenant. The Company shall comply with the
Remaining Months Liquidity covenant set forth in Section 5.1 in the Schedule to
the Loan and Security Agreement between Silicon Valley Bank and the Company
dated December 30, 2002.
(f) Compliance with Law. The Company shall comply with, or
cause compliance with in all material respects all applicable legal
requirements.
(g) Notices of Certain Events. The Company shall promptly,
upon acquiring notice or giving notice, as the case may be, or obtaining
knowledge thereof, give written notice to the Purchasers of (i) any litigation
pending or, to the knowledge of the Company, threatened against the Company,
involving any material claims by or against the Company or involving any
material injunctive, declaratory or other equitable relief (with such notice to
include copies of all papers filed in such litigation) in which an adverse
result would reasonably be expected to have a material adverse effect on the
Company; (ii) any material dispute under, any claim of any breach or default
with respect to, or any threat by any person of any dispute or claim of breach
or default under, any material agreement to which the Company is a party,
including without limitation any Loan Document; or (iii) any dispute or disputes
which may exist between the Company and any
16
governmental agency or authority in which an adverse result would reasonably be
expected to have a material adverse effect on the Company.
(h) Corporate Existence. The Company shall maintain and
preserve its existence and good standing as a Delaware corporation and maintain
and preserve its qualification to do business in each other jurisdiction where
the nature of its assets, properties or activities in such jurisdiction requires
it to be so qualified and where the failure to be so qualified would reasonably
be expected to result in a material adverse effect on the Company.
10. Indemnity.
(a) Obligation to Indemnify. Without limiting the Company's
other obligations hereunder or under any Note, the Company shall indemnify,
defend and hold harmless the Purchasers, their respective officers, directors,
managers, members, shareholders, constituent partners, affiliates, controlling
persons, employees, agents and representatives (individually, an "Indemnitee,"
and collectively, the "Indemnitees") from and against and reimburse the
Indemnitees for any and all claims, obligations, liabilities, losses, damages,
injuries (to person, property, or natural resources), penalties, stamp or other
similar taxes, actions, suits, judgments, costs and reasonable expenses
(including attorney's fees) of whatever kind or nature, whether or not well
founded, meritorious or unmeritorious, demanded, asserted or claimed against any
such Indemnitee (collectively, "Claims") in any way relating to, or arising out
of or in connection with any Purchase Document or any of the transactions
contemplated hereunder or thereunder; provided, however, that no Indemnitee
shall be entitled to be held harmless or indemnified by the Company for any
Claim to the extent arising from the gross negligence, intentional misconduct or
knowing and culpable violation of the law by such Indemnitee (as determined by a
final adjudication by a court of competent jurisdiction.
(b) Notice. Each Indemnitee shall notify the Company in
writing of any action against such Indemnitee in respect of which the Company is
or may be obligated to provide indemnification under this Section 10 promptly
after the receipt of notice of the commencement thereof. The omission of any
Indemnitee so to notify the Company of any such action shall not relieve the
Company from any liability which the Company may have to such Indemnitee except
to the extent (and only the extent) the Company shall have been materially
prejudiced by the omission of such Indemnitee so to notify the Company. In case
any such action shall be brought against any Indemnitee of which such Indemnitee
shall have notified the Company, the Company shall be entitled to participate
therein and, to the extent that the Company may wish, to assume the defense
thereof, with counsel reasonably satisfactory to such Indemnitee. After notice
from the Company to such Indemnitee of its election so to assume the defense
thereof, the Company will not be liable to such Indemnitee under this Section 10
for any legal or other expense subsequently incurred by such Indemnitee in
connection with the defense thereof nor for any settlement thereof entered into
without the consent of the Company; provided, however, that (a) if the Company
does not elect, or otherwise fails, to assume the defense of such claim or
action or (b) if the Indemnitee reasonably determines (x) that there may be a
conflict between the positions of the Company and of the Indemnitee in defending
such claim or action or (y) that there may be legal defenses available to such
Indemnitee different from or in addition to those available to the Company, then
separate counsel for the Indemnitee shall be entitled to participate in and
conduct the defense, in the case of (a) and (b)(x), or such
17
different defenses, in the case of (b)(y), and the Company shall be liable for
any reasonable legal or other expenses incurred by the Indemnitee in connection
with the defense, such expenses to be reimbursed promptly as incurred. In the
event the Company elects to assume the defense of any claim tendered in
accordance with this Section 10, the Company shall be solely and unconditionally
responsible for the resolution of such claim, it being expressly understood that
no such defense may be undertaken under a reservation of rights or with similar
limitations or conditions. Any amounts payable by the Company pursuant to this
Section 10 shall be promptly paid by the Company after the Company's receipt of
an invoice for such amounts from any Indemnitee.
(c) Settlement. The Company agrees that, without the prior
consent of the applicable Indemnitee(s), which will not be unreasonably
withheld, the Company will not settle, compromise or consent to the entry of any
judgment in any pending claim, threatened claim, action, proceeding or
investigation in respect of which indemnification or contribution could be
sought under this Section 10 unless such settlement, compromise or consent
includes an unconditional release of each such Indemnitee from all liability
arising out of such claim, action, proceeding or investigation. Any Indemnitee
against whom any Claim is made shall be entitled to compromise or settle any
such Claim if such Indemnitee determines in its reasonable discretion that
failure to promptly compromise or settle such Claim is reasonably likely to have
a material adverse effect on such Indemnitee. Unless such Indemnitee reasonably
determines that its interests would be materially prejudiced thereby (and
without limiting such Indemnitee's right to agree to such compromise or
settlement as aforesaid), such Indemnitee shall consult with representatives of
the Company concerning any proposed compromise or settlement. Any such
compromise or settlement so agreed by such Indemnitee shall be binding upon the
Company for purposes of this Section 10.
(d) Not Exclusive. The foregoing indemnification provisions
are in addition to, and not in derogation of, any statutory, equitable or common
law remedy any party may have for breach of representation, warranty, covenant
or agreement. The provisions of this Section 10 shall survive any exercise by
any Purchaser or by Designated Purchaser of any right or remedy under any
Purchase Document and satisfaction or discharge of the Company's obligations
hereunder and thereunder, and shall be in addition to any other rights and
remedies of any of the Purchasers or the Designated Purchaser.
(e) Contribution. If for any reason the foregoing
indemnification is held unenforceable, then the Company shall contribute to the
loss, claim, damage, liability or expense for which such indemnification is held
unenforceable to the fullest extent permitted by applicable law.
(f) Reliance. The parties acknowledge that the undertakings
made by the Company in this Section 10 are a material inducement to the
Purchasers and the Designated Purchaser who would not purchase any Notes or
Warrants hereunder without such an undertaking on behalf of the Company. Each
Indemnitee is an intended third party beneficiary of this Section 10 and may
enforce it against the Company.
11. Definitions. As used herein, the following terms shall have the
following meanings:
18
"Indebtedness": any liability, whether or not contingent, (i) with
respect to borrowed money, or evidenced by bonds, notes, debentures or similar
instruments, (ii) representing the balance deferred and unpaid of the purchase
price of any property or services (except such balance that constitutes an
account payable to a trade creditor created or incurred in the ordinary course
of business, (iii) as lessee under leases that are capital leases for GAAP
purposes, (iv) consisting of reimbursement obligations with respect to surety
bonds, letters of credit, banker's acceptances, drafts or similar documents or
instruments issued for the liable Person's account, and (v) as a guarantor for
any liability described in clause (i), (ii), (iii) or (iv) of this definition,
including any guarantor arising from the pledge of any property as security for
any liability of a third party described in clause (i), (ii), (iii) or (iv) of
this definition.
"Jointly and Severally": with respect to the Purchasers, all of the
applicable costs, fees or other obligations shall be borne jointly and severally
by the Purchasers (other than the Designated Purchaser), provided that (i) as
between the Designated Purchaser on the one hand and the Purchasers on the
other, all such costs, fees and other obligations shall be borne pro rata among
the Purchaser Representatives (based upon the principal amount of the Notes held
by them) and no Purchaser Representative shall be liable for any costs, fees or
obligations of any other Purchaser Representative and (ii) each Purchaser
Representative shall have a right of contribution from all other Purchasers
(other than the Designated Purchaser) for their respective pro rata share of
such costs, fees and other obligations (based on the principal amount of the
Notes held by them).
"Liens": any lien (statutory or other), mortgage, pledge, hypothecation,
assignment, deposit arrangement, security interest, charge, claim or other
encumbrance of any kind (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any agreement to give any
security interest) and any agreement to give or refrain from giving a lien,
mortgage, pledge, hypothecation, assignment, deposit arrangement, security
interest, charge, claim or other encumbrance of any kind.
"Person": any individual, sole proprietorship, corporation, limited
liability company, limited liability partnership, partnership, joint venture,
trust, unincorporated organization, estate or any other entity or any
governmental agency.
"Purchase Documents": this Agreement, the Notes, the Warrants and all
documents needed or appropriate to grant, perfect or give notice of the
Designated Purchaser's security interest in the Collateral.
"Requisite Holders": at any time, the Purchasers holding 75%, measured
by principal amount, of the Notes outstanding.
"SEC": the Securities and Exchange Commission.
"Senior Debt: the Liens in favor of Silicon Valley Bank an CIT
Technology Financing Services, Inc. in effect as of the date of this Agreement.
"Securities Act": the Securities Act of 1933, as amended.
19
"UCC": the Uniform Commercial Code in effect from time to time in the
relevant jurisdiction and, in the case of the Collateral definition, the Uniform
Commercial Code as in effect from time to time in the State of California.
12. Miscellaneous.
(a) Entire Agreement. This Agreement, together with the
other Purchase Documents, constitute the full and entire understanding and
agreement between the parties with regard to the subject matters hereof and
thereof.
(b) Waivers and Amendments. No provision of this Agreement
or any other Purchase Document may be amended, waived or modified other than by
a document signed by the Company and the Requisite Holders (as of the effective
date of such action); provided, however, that no amendment, waiver or
modification that accomplishes of any of the following may be made without the
consent of all the Purchasers that would: (i) modify this subsection, (ii)
increase the maximum commitment of a Purchaser, (iii) extend the termination
date for funding Additional Issuances, or (iv) modify the definition of
Requisite Holders; and provided further, however, that no amendment, waiver or
modification that affects the rights or obligations of the Designated Purchaser
or any former Designated Purchaser may be made without the consent of the
Designated Purchaser or such former Designated Purchaser. Each Purchaser
acknowledges that the Requisite Holders will have the power under this
subsection to diminish or eliminate rights of such Purchaser under this
Agreement and the other Purchase Documents (including the Note and Warrant) to
the extent provided in this subsection. Each Purchaser further acknowledges that
the Purchaser Representatives will have certain rights to determine and modify
Purchaser's obligations and rights hereunder.
(c) Consent to Appointment of Agents; Indemnification by
Purchasers. By executing and delivering its signature page to this Agreement,
each Purchaser hereby irrevocably authorizes the Purchaser Representatives and
the Designated Purchaser to each take such action or to refrain from taking such
action on its behalf to the extent provided for in this Agreement and the
Purchase Documents. Without limiting the generality of the foregoing, each
Purchaser hereby irrevocably authorizes the Purchaser Representatives in their
sole discretion (a) to determine whether to authorize an Additional Issuance and
(b) to cause such other actions to be taken under the Notes and Warrants as set
forth thereunder. In consideration of the Purchaser Representatives' and
Designated Purchaser's acceptance of this appointment, the Purchasers (other
than the Initial Designated Purchaser), Jointly and Severally, agree to
indemnify and hold the Purchaser Representatives and Designated Purchaser
harmless from and against any and all losses, claims, damages, liabilities,
actions or expenses of any kind whatsoever which may at any time be imposed on,
incurred by or asserted against the Purchaser Representatives or Designated
Purchaser in any way relating to or arising out of, this Agreement or the
Purchase Documents, the matters contemplated hereby, or any action taken or
omitted by the Purchaser Representatives under or in connection with any of the
foregoing, and to reimburse the Purchaser Representatives or Designated
Purchaser for all costs and expenses, including, among other things, reasonable
legal fees and expenses incurred by reason of any matter as to which an
indemnity is paid.
20
(d) Purchaser Rights. Each Purchaser (including without
limitation, the Designated Purchaser) shall have the absolute right to exercise
or to refrain from exercising any right such Purchaser has under this Agreement
and the other Purchase Documents, including the right to consent to an
amendment, waiver or modification of any of such documents, and such Purchaser
shall not incur any liability to any other Purchaser with respect to exercising
or refraining from exercising any such right.
(e) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THE PURCHASE DOCUMENTS
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTS OF LAW RULES
OR PROVISIONS (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE
STATE OF CALIFORNIA.
(f) JURISDICTION AND VENUE. ALL JUDICIAL PROCEEDINGS BROUGHT
AGAINST THE COMPANY OR ANY OF ITS SUBSIDIARIES WITH RESPECT TO THE PURCHASE
DOCUMENTS MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN SAN FRANCISCO COUNTY, CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS
AGREEMENT THE COMPANY AND EACH OTHER PARTY ACCEPTS FOR ITSELF AND IN CONNECTION
WITH ITS RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE
JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY. EACH PARTY HEREBY WAIVES ANY CLAIM THAT SAN FRANCISCO
COUNTY, CALIFORNIA IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK
OF VENUE. THE PARTIES AGREE THAT SERVICE OF PROCESS MAY BE ACCOMPLISHED BY ANY
MEANS AUTHORIZED BY CALIFORNIA LAW.
(g) Notices. Any notice, request or other communication
required or permitted hereunder or the other Purchase Documents shall be in
writing and shall be deemed to have been duly given if personally delivered or
mailed by registered or certified mail, postage prepaid, or by recognized
overnight courier or personal delivery or sent by facsimile, addressed (i) if to
a Purchaser, at the address such Person has furnished to the Company in writing,
or (ii) if to Company, at the address set forth on the signature page hereof or
such other address as it has furnished to the Purchasers in writing in
accordance with this subsection. A notice shall be deemed effectively given, (a)
upon personal delivery to the party to be notified; (b) when sent by confirmed
facsimile if sent during normal business hours of the recipient, and if not,
then on the next business day; (c) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid; or (d)
one (1) business day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of receipt.
(h) Expenses. Except for Initial Designated Purchaser, each
party shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and
21
performance of the Purchase Documents; provided, however, that the Company shall
pay for the reasonable fees and expenses of Xxxxxx & Xxxxxxx, special counsel to
the Purchaser Representatives, in an amount not to exceed $33,000 in connection
with the Initial Closing. The Company shall pay the out of pocket costs and
expenses (including legal fees and expenses) of the Initial Designated Purchaser
incurred in connection with the negotiation, execution and delivery of this
Agreement in an aggregate amount not to exceed $5,000; provided, however, that
the foregoing maximum amount shall not apply to (i) the costs of third party
filing services and filing fees incurred in connection with the filing of
Uniform Commercial Code financing statements, all of which costs and fees shall
be paid by the Company, and (ii) the out of pocket costs and expenses of the
Initial Designated Purchaser incurred after the execution and delivery of this
Agreement, the indemnification of such out of pocket costs and expenses being
governed by Section 10(a) hereof.
(i) Enforcement Costs. If a party seeks to enforce its
rights under any of the Purchase Documents by legal proceedings or otherwise,
then the non-prevailing party shall pay the prevailing party's reasonable costs
and expenses, including all reasonable attorneys' fees.
(j) Validity. If any provision of this Agreement is
judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
(k) Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto, including with respect to any sale, disposition, or other
transfer of any Note or Warrant in conformance with this Agreement.
(l) California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE
CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS
SO EXEMPT.
(m) Delays or Omissions. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to any Purchaser or the
Designated Purchaser, upon any breach or default of the Company under or with
respect to this Agreement, any Note or Warrant, or any other Purchase Document,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach or default, or any acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. It is further agreed that any waiver,
permit, consent or approval of any kind or character by the Requisite Holders or
any Purchaser of any breach or default under this Agreement, or any waiver by
the Requisite Holders or any Purchaser of any provisions or conditions of this
Agreement
22
must be in writing and shall be effective only to the extent specifically set
forth in writing and that all remedies, either under this Agreement, or by law
or otherwise afforded to the Purchasers, shall be cumulative and not
alternative.
(n) Waiver of Potential Conflicts of Interest. Each of the
Purchasers and the Company acknowledges that Xxxxxx & Xxxxxxx ("L&W") has
represented and continues to represent the Company in certain matters unrelated
to this Agreement and the Purchase Documents. In the course of such
representation, L&W may have come into possession of confidential information
relating to the Company. Each of the Purchasers and the Company acknowledges
that L&W is representing only the Purchaser Representatives in this transaction.
By executing this Agreement, each of the Purchasers and the Company hereby
waives any actual or potential conflict of interest which may arise as a result
of L&W's representation of such persons and entities and L&W's possession of
such confidential information. Each of the Purchasers and the Company represents
that it has had the opportunity to consult with independent counsel concerning
the giving of this waiver.
(o) Legal Representation of Initial Designated Purchaser. In
connection with the negotiation, drafting and execution of this Agreement and
the other Purchase Documents, and in connection with future legal representation
relating to the transactions contemplated hereby, Xxxx Xxxxxxx LLP only has
represented and only shall represent the Initial Designated Purchaser in its
capacity as Designated Purchaser and as a Purchaser. Each other Purchaser hereby
acknowledged that Xxxx Xxxxxxx LLP does not represent it in connection with any
other matters.
(p) Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
(q) Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall be deemed to constitute one instrument.
23
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first written above.
ZHONE TECHNOLOGIES, INC.
By:
------------------------------
Title:
---------------------------
PURCHASER:
By:
------------------------------
Title:
---------------------------
EXHIBIT "A"
SCHEDULE OF PURCHASERS
PRINCIPAL
PURCHASER AMOUNT ADDRESS
---------------------------------------------- ---------------- ------------------------------------------------
KKR-ZT, LLC $ 8,000,000 0000 Xxxx Xxxx Xx, Xxxxx 000, Xxxxx Xxxx, XX
00000
TPG Bacchus II, LLC $ 8,000,000 000 Xxxxxxxx Xx., Xxxxx 0000, Xxxx Xxxxx, XX
00000
New Enterprise Associates 8, L.P. $ 500,000 0000 Xx. Xxxx Xx., Xxxxxxxxx, XX 00000
New Enterprise Associates 8A, L.P. $ 1,000,000 0000 Xx. Xxxx Xx., Xxxxxxxxx, XX 00000
New Enterprise Associates 9, L.P. $ 3,500,000 0000 Xx. Xxxx Xx., Xxxxxxxxx, XX 00000
Six Rivers Group $ 100,000 00-00 Xxxxx'x Xxxx Xxxx, Xxxxxxx, Xxxx Xxxx
Xxxxxx Family LLC $ 30,000 000 Xxxxxxx Xx., Xxxxx 000, Xxx Xxxxxxxxx, XX
00000
Xxxxx Family Partnership $ 30,000 000 Xxxxxxx Xx., Xxxxx 000, Xxx Xxxxxxxxx, XX
00000
Xxxxx Ventures IV $ 000,000 Xxxxxxxx Xxxx, Xxxxx 000, 0000 Xxxx Xxxx Xx.,
Xxxxx Xxxx, XX 00000
Manport LLC $ 25,000 00000 Xxxxx Xxxxxx Xx., Xxxxx Xxxxx, XX 00000
MLS III LP $ 100,000 0000 Xxxxxx Xxxx Xx., Xxxxxxxxxxxxx, XX 00000
Xxxxxxx Xxxxxxx $ 5,000 0000 Xxxx Xxxxxx Xx, Xxxxx, XX 00000
Boon Hwee Koh $ 25,000 00 Xxxxx Xxxxxx Xxxx, Xxxxxxxxx 000000
Xxxx Xxxxxxxx $ 10,000 X.X. Xxx 000, 0000X Xxxxxxx Xxx., Xxxxxxx, XX
00000
Xxxxxx Xxxxx $ 20,000 000 Xxxxxx Xx., 0xx Xxxxx, Xxxx Xxxx, XX 00000
Xxxxxxx Xxx $ 100,000 0000 XxXxxxxx Xxxx., Xxxxxxxx, XX 00000
Xxxxx X. Xxxxxxxxx, as trustee of the Xxxxx X. $ 50,000 0000 Xxxxxxxxx Xx., Xxxxxxxx, XX 00000
Colicchio Trust, dated
July 7, 2000
Xxxxxxx Xxxxxxx $ 100,000 0000 Xxxx Xxx Xxxxxx Xx., Xxxxxxxx, XX 00000
Xxxxx Xxxxxxx $ 100,000 0000 Xxxx Xxx Xxxxxx Xx., Xxxxxxxx, XX 00000
Bo Price $ 100,000 0000 Xxxxxxxxxxx, Xxxxxx, XX 00000
Xxx Xxxx $ 500,000 0000 Xxxxxx Xxxxxxx Xxxxxxx, Xxxxx 000, Xxxxxxx,
XX 00000
Xxxx Xxxxxx, as trustee of the Xxxx Xxxxxx $ 800,000 0000 Xxxxxxx Xx., Xxxxxxx, XX 00000
Trust
A-1
Xxxxxxxxx Xxxxxx, as trustee of the Xxxxxx $ 800,000 0000 Xxxxxxx Xx., Xxxxxxx, XX 00000
Living Trust
Xxxx Xxxxxx $ 12,630 00 Xxxxxxxx Xx., Xxxxxx, XX 00000
APC Investments No. 4 $ 162,370 00X, Xxx Xxxx Xxxx Xxxx Xxxxxxxx, 0X Xxxxxxx
Xxxx Xxxxxxx, Xxxx Xxxx
Aman Ventures $ 400,000 00000 Xxxxxxxx Xx., Xxx Xxx, XX 00000
CSFB Venture Fund I, LP $ 180,230 0000 Xxxxxxx Xx., Xxxx Xxxx, XX 00000
CSFB Technology Group I, LP $ 34,770 0000 Xxxxxxx Xx., Xxxx Xxxx, XX 00000
Agility Capital LLC $ 15,000 000 X. Xxxxx Xxxxxxx, Xxxxx Xxxxxxx, XX 00000
A-2
EXHIBIT "B"
FORM OF CONVERTIBLE SECURED PROMISSORY NOTE
B-1
EXHIBIT "C"
FORM OF WARRANT
C-1
EXHIBIT "D"
INTERCREDITOR AGREEMENT
D-1
