EXHIBIT 4 (z)
October 7, 1998
Xx. Xxxxxxxx "Xxxxx" Xxxxxxxx
0000 Xxxxx Xxxxx Xxxxx
Xxxxxxx Xxxxx, XX 00000
Re: Digital LAVA Inc. (the "Company")
Dear Xx. Xxxxxxxx:
This letter confirms the agreement of Xxxxxxxx "Xxxxx" Xxxxxxxx ("Xx.
Xxxxxxxx"), Xxxxxxx and Xxxxxxxxxxx Xxxxxxxx ("S&P") and Xxxxxxx Xxxxx
("Andreas"; collectively with Xx. Xxxxxxxx and S&P, the "Lenders") to waive,
subject to the terms and conditions set forth herein, existing defaults and
extend the maturity date arising under certain promissory notes of the Company
and to accept the Company's recapitalization offer as reflected in its letter to
certain lenders of the Company dated July 16, 1998, a true and correct copy of
which is attached hereto as Exhibit A (the "Recapitalization Letter"), subject
only to modification as provided herein.
As you know, the Company currently has the following outstanding
obligations to the Lenders represented by three promissory notes (the "Notes"):
Lender Amt. Date of Loan Maturity Date
Xx. Xxxxxxxx $150,000 7/28/97 7/28/98
S&P $150,000 7/28/97 7/28/98
Andreas $ 25,000 7/28/97 7/28/98
In connection with the loans represented by the Notes, the Company also
issued to the Lenders warrants (the "Warrants") to purchase shares of Common
Stock of the Company (the "Common Stock"), as follows:
Lender No. Warrants Originally Current No. Warrants after Current Exercise
Issued Exercise Price* anti-dilution Price after anti-
adjustments to date dilution
adjustments
Xxxxxxxx 150,000** $.87 159,956 $.8159
S&P 150,000 $.87 159,956 $.8159
Andreas 25,000 $.87 26,660 $.8159
* The Warrants had an original exercise price of $.97 per share, which was
reduced to $.87 per share upon the Company's election to extend the
maturity date of the loans represented by the Notes from 1/28/98 to
7/28/98.
** Does not include 24,375 finders' warrants originally issued to Xx. Xxxxxxxx
(currently 25,993 Warrants with an exercise price of $.8159) (the "Finders'
Warrants").
In consideration for the Lenders' waiver of their current rights to
acceleration under the Notes and to extend their maturity date, and for the
relinquishment by Xx. Xxxxxxxx and the other Lenders of their rights as an
"observer" to meetings of the Company's Board of Directors ("Board Visitation
Rights"), as provided in a letter to Xx. Xxxxxxxx from the Company dated as of
July 28, 1997 (the "Observer Letter") and in the Subscription Agreement between
the Company and the Investors dated as of July 28, 1997 (the "Subscription
Agreement"), we have agreed as follows:
1. The Lenders accept the offer of the Company provided in the Recapitalization
Letter, as modified herein: upon the consummation of the contemplated initial
public offering of the Company's securities ("IPO") and the repayment of 50% of
the outstanding principal amount of the Notes, the Lenders will cancel the
balance of the outstanding principal interest under the Notes and all accrued
interest thereon and will surrender all of their warrants (excluding Mr.
Sedahgat's Finder's Warrants and the Warrants granted to Xx. Xxxxxxxx and/or his
designees pursuant to this Agreement), in exchange for that number of shares of
Common Stock (the offering of such shares having been duly registered under the
Securities Act of 1933, as amended, and subject to a lock-up agreement to be
entered into by the other "Unsecured Bridge Lenders" as defined below, the
Secured Lender, and the officers and directors of the Company having a lock-up
period no longer than the lock-up period to which the foregoing referenced
persons are subject) with a dollar value equal to 225% (the "Exchange
Percentage") of the entire principal amount of each Lender's Note, valued at the
price of the Company's Common Stock at the IPO. For example, assuming the price
of the Company's Common Stock in the IPO is $7.50 per share, the Company will
provide Xx. Xxxxxxxx concurrently with the consummation of the IPO $75,000 in
cash and 45,000 shares of Common Stock (on a post-reverse split basis). The
foregoing recapitalization proposal is referred to herein as the
"Recapitalization Offer." The Recapitalization Letter provided for an Exchange
Percentage of 175%; after negotiations with several other lenders to the
Company, it was increased to 200% for all unsecured bridge lenders to the
Company with loans to the Company aggregating $3,019,500 principal amount
(collectively the "Unsecured Bridge Lenders"), including the Lenders. The
Lenders acknowledge that the increase of the Exchange Percentage to 225% is for
the benefit of all of the Unsecured Bridge Lenders who accept the
Recapitalization Offer.
2. The Company has agreed to retain Xx. Xxxxxxxx as a consultant to provide
advice on general corporate matters commencing October 1, 1998, at an annual
rate of $100,000, payable monthly at a rate of $8,333.34, with the payments to
be accrued and deferred until the earliest of (i) 1/1/99, (ii) the termination
or abandonment of the IPO, (iii) the successful consummation of the IPO, or (iv)
upon the Company's breach of any of the covenants set forth in Section 5 of this
letter agreement.
3. In connection with Xx. Xxxxxxxx'x consultancy, the Company will also issue to
Xx. Xxxxxxxx and/or his designees upon the consummation of the IPO, 20,000
warrants ("Consultant's Warrants") to purchase Common Stock (on a
post-reverse-split basis) at an
exercise price equal to 90% of the IPO price of the Common Stock (currently
contemplated to be $7.50, so the exercise price would be $6.75 per share). The
Consultant's Warrants will not be exercisable for a period of one year from the
date of issuance and will expire on the seventh anniversary of the date of
issue. The Company will give Xx. Xxxxxxxx unlimited piggyback and two demand
registration rights with respect to the shares of Common Stock issuable upon
exercise of the Consultant's Warrants and Finder's Warrants similar to the
registration rights granted with respect to shares of Common Stock issuable upon
exercise of the Warrants. The Consultant's Warrants will be in substantially
similar form to the Warrants and will contain equivalent anti-dilution
provisions. If the IPO is terminated, the Warrants will be issued on a
pre-reverse split basis (a 1 for 8.79 reverse split is contemplated, in which
case Xx. Xxxxxxxx would be issued 175,800 Warrants at an exercise price of
$.7679 per share). Counsel for the Company will prepare a Consulting Agreement
and a Consultant's Warrant Agreement for review and execution promptly after the
execution of this letter by the parties, but no later than 7 days after the date
hereof.
4. In connection with the consulting arrangements outlined in paragraph 2 above,
several of the founders of the Company -- Messrs. Xxx Xxxxxxx, Xxx Xxxxxxx, Xxx
Xxxxxxx and Xxxxx Xxxxxx (collectively the "Founders") -- will jointly and
severally guarantee the Company's obligations for up to $25,000, provided that
any payments by the Founders will not be due and payable until January 1, 1999.
In connection therewith, each of the Founders has simultaneously herewith
executed and delivered a Guaranty Agreement to Xx. Xxxxxxxx.
5. Each of the Lenders hereby waives any default under the Notes and agrees to
extend the Maturity Date thereunder to December 31, 1998, subject to
satisfaction by the Company of the following covenants:
(A) The Company will prepare and file with the Securities and Exchange
Commission ("SEC") a registration statement on Form SB-2 or other
appropriate form (the "Registration Statement") on or prior to October 23,
1998;
(B) The Registration Statement will be declared effective by the SEC on or
before December 31, 1998;
(C) Neither the Company nor any of its subsidiaries will incur any
indebtedness for borrowed money or guarantee any such indebtedness of
another person or entity, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any of its
subsidiaries (except as set forth in subparagraph (E) below), guarantee any
debt securities of another person or entity, enter into any "keep well" or
other agreement to maintain any financial statement condition of another
person or entity or enter into any arrangement having the economic effect
of any of the foregoing or make any loans, advances or capital
contributions to, or investments in, any other person or entity; except the
Company and its subsidiaries may incur and make payments on (i) trade
payables and operating expenses incurred in the ordinary course of business
consistent with past
practice, and (ii) indebtedness that is expressly junior and subordinated
to the indebtedness represented by the Notes;
(D) Neither the Company nor any of its subsidiaries will grant or permit to
exist any liens or other encumbrances on any of its assets, other than (i)
the existing first lien on its assets granted to certain secured lenders of
the Company who loaned the aggregate principal amount of $1,750,000 to the
Company between November 1997 and February 1998, and (ii) a lien to be
granted to certain of the Unsecured Bridge Lenders who have declined to
accept the Recapitalization Offer and who instead have accepted an offer of
the Company (the "Alternate Offer") to allow them to retain their warrants
and to continue as lenders to the Company with respect to those principal
amounts of their loans that will not repaid at the IPO, provided that no
more than $200,000 of such indebtedness is secured by any lien. To date,
Unsecured Bridge Lenders holding only $187,500 have opted for the Alternate
Offer, and true and correct copies of one term sheet reflecting the
Alternate Offer is attached hereto as Exhibit B;
(E) Neither the Company nor any of its subsidiaries will issue, deliver,
sell, pledge or otherwise encumber or amend any shares of its capital
stock, any other voting securities orany securities convertible into, or
any rights, warrants or options to acquire, any such shares, interests,
voting securities or convertible securities; except for (i) the Common
Stock and warrants to be issued in the IPO (including underwriters
compensation), (ii) Common Stock issued pursuant to the Recapitalization
Letter, (iii) warrants to purchase no more than 250,000 shares of Common
Stock (on a post-reverse split basis) at an exercise price not less than
130% of the per share price to the public in the IPO, issued in connection
with an unsecured, subordinated bridge loan to be made to the Company in a
principal amount not to exceed $500,000 on the initial filing of a
registration statement by the Company, or on such other terms which are
materially different than the above described terms as shall be reasonably
acceptable to Xx. Xxxxxxxx, (iv) options to purchase 46,666 shares of
Common Stock to be granted to certain of the Company's employees
concurrently with the consummation of the IPO with exercise prices no less
than the per share price to the public in the IPO, and (v) sales of
securities (including the debt and equity securities referenced in
subparagraph (iii) above) to persons not affiliated with the Company at a
price not less than the fair market value of such securities as determined
in good faith by the Board of Directors of the Company, provided that in
connection with such sale the Company shall offer to Xx. Xxxxxxxx or his
designees the right to purchase that number of the offered securities in
order to allow Xx. Xxxxxxxx to maintain his percentage ownership of the
equity securities of the Company (determined exclusive of options
previously granted to employees of the Company), on the same terms and
conditions offered by the Company in connection with such sale of
securities;
(F) All of the documents to be executed and delivered by the Company shall
be executed and delivered to Xx. Xxxxxxxx within the time limits specified
herein; and
(G) True and correct copies of the resolutions of the Board of Directors of
the Company authorizing and approving the execution, delivery and
performance of this agreement and the other agreements and documents
referred to herein, shall be delivered (certified by the Company's
secretary) to Xx. Xxxxxxxx within 7 days of the date hereof.
The covenants set forth in paragraphs (C), (D) and (E) above shall terminate and
be of no further force or effect upon the closing of the IPO, or ten (10)
business days after the Company has notified Xx. Xxxxxxxx of the abandonment or
termination of the IPO, whichever is earlier. The Company will promptly notify
Xx. Xxxxxxxx if any of the foregoing covenants are breached. In any case, the
loans represented by the Notes will become immediately due and payable upon any
such breach whether or not notice has been given to Xx. Xxxxxxxx.
6. Effective immediately, Xx. Xxxxxxxx and the other Lenders have relinquished
their Board Visitation Rights, as created by the Observer Letter, the
Subscription Agreement or otherwise.
7. The reasonable fees and disbursements of Xx. Xxxxxxxx'x counsel in connection
with the negotiation of this Agreement and related agreements and documents
shall be paid by the Company.
8. Xx. Xxxxxxxx and the other Lenders acknowledge receipt of the
Recapitalization Letter, together with the attachments thereto. Xx. Xxxxxxxx and
each Lender also agree to return their original Notes and Warrant certificates
(other than the certificates representing the Finders' Warrants and the
Consultant's Warrants), or the Lost Note and/or Warrant Affidavit and Indemnity
Agreement to Xxxxxxxxxx Xxxxxxxxx Xxxxxx & Xxxxxx LLP to be held in escrow in
accordance with the terms of the Recapitalization Letter.
Each of the Lenders acknowledges that he or they have not relied upon any
representations or warranties of the Company or the Founders as to the Company,
its business, prospects or financial status, other than as provided herein
(including without limitation the Exhibits attached hereto), in the "Digital
LAVA, Inc. Company Summary" attached to the Recapitalization Letter, the pro
forma capitalization table attached hereto as Exhibit C, or in the other
materials included with the Recapitalization Letter. The parties acknowledge
that the agreements provided herein contain the entire understanding and
agreement of the parties hereto and supersede any and all prior negotiations,
discussions, understandings and agreements among the parties.
This Agreement shall be governed by, and shall be construed and interpreted
in accordance with, the substantive laws of the State of California, and any
disputes arising hereunder shall be tried in the courts of the State of
California, which shall have exclusive jurisdiction thereunder.
The parties agree to execute and deliver such additional documents and
perform such further acts as may be reasonably necessary or appropriate to
effectuate the purposes of this Agreement.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original hereof and all of which, together, shall
constitute one and the same instrument.
We appreciate your accommodations and thank you for your continued interest
and support.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Xxxxx Xxxxx
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Authorized Officer
ACCEPTED AND AGREED TO:
/s/ Xxxxxxxx Xxxxxxxx
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Xxxxxxxx "Xxxxx" Xxxxxxxx
/s/ Xxxxxxx and Xxxxxxxxxxx Xxxxxxxx
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Xxxxxxx and Xxxxxxxxxxx Xxxxxxxx
/s/ Xxxxxxx Xxxxx
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Xxxxxxx Xxxxx
