STOCK PURCHASE AND REGISTRATION RIGHTS AGREEMENT
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STOCK PURCHASE AND REGISTRATION RIGHTS AGREEMENT dated as of September 25,
2002, between DIRECT INSITE CORP., a Delaware corporation (the "Company"), and
METROPOLITAN VENTURE PARTNERS II, L.P., a Delaware limited partnership (the
"Purchaser").
WHEREAS, the Purchaser desires to subscribe for, and the Company desires to
issue to the Purchaser, 93,458 shares of the Company's Series A Convertible
Preferred Stock, par value $0.0001 per share (the "Preferred Stock"), all upon
the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
premises, covenants, representations and warranties herein contained, it is
hereby agreed as follows:
1. Definitions.
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1.1 Except for any terms that are defined elsewhere in this Agreement, the
following terms, as used herein, have the following meanings:
"Accredited Investor" has the meaning set forth in Rule 501 of Regulation D
promulgated under the Securities Act.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agreement" means this Stock Purchase and Registration Rights Agreement,
together with all Exhibits and Schedules hereto, as the same may be amended,
supplemented or modified in accordance with the terms hereof from time to time.
"Annual Report" has the meaning set forth in Section 3.9 hereof.
"Balance Sheet" has the meaning set forth in Section 3.9 hereof.
"Balance Sheet Date" has the meaning set forth in Section 3.9 hereof.
"Board of Directors" means the board of directors of the Company.
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"Cause" means, with respect to the Purchaser Designee, as applicable, (i)
any act of breach of such individual's fiduciary duty to the Company or its
stockholders by the Purchaser Designee which under applicable law (A)
constitutes a violation of any legal obligation of the Purchaser Designee to the
Company or (B) creates or results in any material legal liability for the
Company; (ii) the Purchaser Designee is convicted of, or pleads guilty or nolo
contendere with respect to, theft, fraud or a felony under federal or applicable
state law; or (iii) if such individual commits and is convicted of any act that
results in the Company or any member of the Board of Directors suffering
liability under federal or applicable state law for discrimination or sexual or
other forms of harassment or other similar liabilities from any employees of the
Company or any of its Affiliates.
"Certificate of Designation" means the Certificate of Designation of the
Company, which, among other things, sets forth the number, designation, relative
rights, preferences and limitations of the Preferred Stock as fixed by the Board
of Directors, and which is substantially in the form set forth in Exhibit A
hereto.
"Closing" means the closing of the sale of the Series A Preferred Stock by
the Company to the Purchaser.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act or the Exchange
Act.
"Common Stock" means the common stock, par value $0.0001 per share, of the
Company.
"Company" has the meaning set forth in the preamble of this Agreement.
"Company Indemnified Person" has the meaning set forth in Section 6.6(b)
hereof.
"Disclosure Schedule" means the Disclosure Schedule of the Company attached
to this Agreement and hereby made a part hereof.
"Environmental Law" means any federal, state, or local (including common
law), statute, code, ordinance, rule, regulation or other requirement relating
to the environment, or natural resources, and includes, but is not limited to,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. 9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. 1801
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., the
Clean Water Act, 33 U.S.C. Section 1251 et seq., the Clean Air Act, 33 U.S.C.
2601 et seq., the Toxic Substances Control Act, 15 U.S.C. 2601 et seq., the
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. 136 et seq., the
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Oil Pollution Act of 1990, 33 U.S.C. 2701 et seq. and the Occupational Safety
and Health Act, 29 U.S.C. 651 et seq., as such laws have been and may from time
to time be further amended or supplemented, and the regulations promulgated
pursuant thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission thereunder.
"Financial Statements" has the meaning set forth in Section 3.9 hereof.
"Form 10-Q" has the meaning set forth in Section 3.9 hereof.
"Hazardous Substances" or "Hazardous Waste" means any pollutant,
contaminant, chemical or industrial or toxic substance or waste, petroleum
products, asbestos, urea formaldehyde, radon, polychlorinated biphenyls,
flammable explosives, nuclear radioactive fuel or waste or any other substance,
waste, material, substance, pollutant or contaminant that is defined as a
hazardous waste or substance under any applicable Environmental Law and/or any
substance for which the generation, manufacture, storage, treatment or release
is prohibited or regulated under any applicable Environmental Law.
"Holder" shall mean any Person that owns Registrable Securities, including
such successors and assigns as acquire Registrable Securities, directly or
indirectly, from such Person. For purposes of this Agreement, the Company may
deem the registered holder of a Registrable Security as the Holder thereof.
"Liens" means any and all security interests, liens, claims, encumbrances,
pledges, options, Taxes and charges of any kind or nature.
"Managing Underwriter" has the meaning set forth in Section 6.1(c) hereof.
"Material Adverse Effect" means, with respect to the Company, a material
adverse effect on the business, assets, condition (financial or otherwise),
results of operations or prospects of the Company and its subsidiaries taken as
a whole.
"Material Development Election" shall have the meaning set forth in Section
6.4(a) hereof.
"Other Approved Holders" shall mean holders of Common Stock having
registration rights with respect to the Common Stock, other than pursuant to the
terms of this Agreement.
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"Person" means any individual, company, corporation, partnership, limited
liability company, trust, division, governmental, quasi-governmental or
regulatory entity or authority or other entity.
"Plans" has the meaning set forth in Section 3.24(a) hereof.
"Preferred Stock" has the meaning set forth in the recital to this
Agreement.
"Prospectus" shall mean the prospectus (including a preliminary prospectus)
included in any Registration Statement, as amended or supplemented by a
prospectus supplement with respect to the terms of the offering of any portion
of the Registrable Securities covered by such Registration Statement and by all
other amendments and supplements to the prospectus, including post-effective
amendments and all material incorporated by reference in such prospectus.
"Purchase Price" has the meaning set forth in Section 2.1 hereof.
"Purchaser" has the meaning set forth in the preamble of this Agreement.
"Purchaser Designee" has the meaning assigned to such term in Section
5.1(a) hereof.
"Purchaser Expenses" means all legal and out-of-pocket expense incurred by
the Purchaser or its agents in connection with the transactions contemplated by
this Agreement, in an amount not to exceed $35,000.00 in the aggregate,
including all fees and expenses of Xxxxxx Xxxxx Xxxxxxxx & Xxxxxxx LLP, counsel
to the Purchaser, incurred in connection with the Transaction Documents.
"Purchaser Indemnified Person" has the meaning set forth in Section 7.1(a)
hereof.
"Registrable Securities" shall mean the Common Stock issuable on or after
the date hereof upon conversion of the Preferred Stock and any other capital
stock or other securities issued or issuable as a result of or in connection
with any stock dividend, stock split or reverse stock split, combination,
recapitalization, reclassification, merger or consolidation, exchange,
distribution or similar transaction in respect of the Preferred Stock or the
Common Stock.
"Registration Expenses" shall have the definition set forth in Section 6.5
hereof.
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"Registration Statement" shall mean any registration statement which covers
any of the Registrable Securities pursuant to the provisions of this Agreement,
including the Prospectus included therein, all amendments and supplements to
such Registration Statement, including post-effective amendments, and all
exhibits and all material incorporated by reference in such Registration
Statement.
"Requesting Securityholder" has the meaning set forth in Section 6.2
hereof.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act, as
amended from time to time, or any similar successor rule thereto that may be
promulgated by the Commission.
"Rule 144A" shall mean Rule 144A promulgated under the Securities Act, as
amended from time to time, or any similar successor rule thereto that may be
promulgated by the Commission.
"SEC Filings" means all forms, reports and documents filed with the
Commission pursuant to the Securities Act and Exchange Act from January 1, 2001
through the date hereof.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Senior Indebtedness" means the principal of and premium, if any, and
interest on:
(a) all indebtedness of the Company and its subsidiaries whether
outstanding on the date of this Agreement or hereafter created and which is;
(i) for money borrowed from a commercial lending institution, whether the
same be evidenced by bonds, notes or debentures or evidenced by a loan
agreement, promissory note or an indenture or similar instrument; or
(ii) secured by mortgage or other security instrument (including, without
limitation, conditional sales agreements, chattel mortgages, purchase money
bonds or notes or debentures or mortgages, mortgages made or given or guaranteed
by the Company as mortgagor or guarantor and assumed or guaranteed mortgages
upon property) for the payment of which the Company is, directly or
contingently, liable or on which the Company customarily pays interest; and
(iii) all obligations of the Company as lessee, or as the guarantor of any
lessee, under leases of personal property of any kind or nature and/or
equipment; and
(b) all renewals, extensions and refundings of any such indebtedness or of
any such obligations.
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"Stock Option Plans" means, collectively, the 1993 Non-Qualified Stock
Option Plans, the 1995 Stock Option Plan, the 2000 Stock Option Plan, 2001 Stock
Option/stock Issuance Plan, 2001-A Stock Option Plan, the 2002 Stock Option Plan
and the 2002-A Stock Plan.
"Suspension Period" shall have the meaning set forth in Section 6.4(a)
hereof.
"To the best knowledge of the Company" means the actual knowledge of Xxxxxx
Xxxxxx, Xxxxxxx Xxxxxxx or Xxxxxx Xxxxxxx.
"Threshold Percentage" means 50.1 percent of (i) the shares of Preferred
Stock issued and outstanding on the Closing Date or (ii) the shares of Common
Stock issuable upon conversion of the Preferred Stock thereof as the same may be
adjusted pursuant to the terms of the Certificate of Designation.
"Transaction Documents" means this Agreement (including the Disclosure
Schedule), the Certificate of Designation and any other documents, instruments
or agreements executed in connection herewith or therewith.
The foregoing definitions shall be equally applicable to both the singular and
plural forms of the defined terms. The use of the word "including" herein shall
be interpreted to mean "including, without limitation," unless the context
clearly requires another interpretation.
2. Authorization and Sale of the Preferred Stock.
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2.1 Purchase and Sale of Preferred Stock. In reliance on the
representations and warranties contained herein and subject to the terms and
conditions hereof, the Company agrees that it will sell to the Purchaser, and
the Purchaser agrees that it will purchase from the Company at the Closing, an
aggregate of 93,458 shares of Preferred Stock and concurrently with delivery
hereof the Purchaser has agreed to pay the Company an amount equal to $21.40 per
share of Preferred Stock, or an aggregate purchase price of $2,000,000 (the
"Purchase Price") by wire transfer in immediately available funds to an account
designated by notice from the Company; provided, however, that the Purchaser
shall deduct the Purchaser Expenses from the Purchase Price.
2.2 Deliverables at Closing. In addition to the foregoing, at the Closing,
the Company shall deliver to the Purchaser:
(a) a stock certificate representing 93,458 shares of Preferred Stock
registered in the name of the Purchaser;
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(b) a opinion of counsel of the Company in the form attached hereto as
Exhibit C;
(c) an executed copy of this Agreement;
(d) a certificate, dated the date of Closing signed by a duly authorized
officer of the Company dated as of the date of the Closing certifying as to:
(i) a true and correct copy of the certificate of incorporation of the
Company (including all amendments), as attached thereto, and the filing of
the Certificate of Designation with the Secretary of State of the State of
Delaware;
(ii) the By-laws, as attached thereto, are in full force and effect;
(iii) the satisfactory waiver of all preemptive rights by the
stockholders of the Company on or before the date of Closing;
(iv) the resolutions, in form and substance reasonably satisfactory to
the Purchaser, of the Board of Directors duly authorizing the execution,
delivery and performance of this Agreement, the filing of the Certificate
of Designation, the issuance of the Preferred Stock and the execution and
delivery of any other documents, instruments or agreements executed in
connection herewith or therewith;
(v) the incumbency and signature of the individuals authorized to
execute and deliver documents on the Company's behalf; and
(vi) the performance and compliance in all material respects with all
of the Company's agreements, representations, warranties, covenants,
obligations, duties and conditions under this Agreement required to be
performed or complied with by it on or prior to the date of closing,
including, but not limited to, the appointment of Xxxxx X. Xxxxxx to Class
II of the Board of Directors.
2.3 Reservation of Shares. The Company shall reserve and keep available for
issuance such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the conversion in full of the Preferred Stock into
Common Stock in accordance with the terms of the Certificate of Designation. All
shares of Common Stock that are so issuable shall, when issued upon conversion,
be duly authorized, validly issued and fully paid and non-assessable, free and
clear of any and all Liens and preemptive or similar rights or encumbrances.
2.4 Use of Cash Proceeds. The Company, shall use the cash proceeds from the
issuance of the Preferred Stock for development and working capital purposes as
determined by the Board of Directors.
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3. Representations and Warranties of the Company.
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The Company makes the following representations and warranties to the
Purchaser as of the date hereof and of as the date of Closing, except as
otherwise provided herein:
3.1 Corporate Status. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it was incorporated with full corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted and to own and lease the properties and assets it now owns or holds
under lease.
3.2 Authority. The Company has all necessary corporate power and authority
to execute and deliver the Transaction Documents and to carry out and perform
its obligations thereunder. The execution, delivery and performance by the
Company of the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby, including the issuance of the Preferred Stock
and the Common Stock issuable upon conversion thereof, have been duly authorized
by all necessary corporate action on the part of the Company and no further
authorization on the part of the Company, or the Company's stockholders, is
necessary to authorize such execution, delivery and performance. The Transaction
Documents, when executed and delivered by the Company, will be duly executed and
delivered by the Company. The Transaction Documents, when so executed, will
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms, except as the
same may be limited by bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally now or hereafter in
effect and subject to the application of equitable principles and the
availability of equitable remedies. The issuance of the Preferred Stock is not
and will not be subject to preemptive rights or rights of first refusal that
have not been properly waived or complied with prior to the date hereof.
3.3 No Conflicts. The execution, delivery and performance of the
Transaction Documents and the other instruments and agreements to be executed,
delivered and performed by the Company pursuant hereto and the consummation of
the transactions contemplated hereby and, thereby by the Company, including the
issuance of the Preferred Stock, and upon conversion of the Preferred Stock, the
Common Stock, do not and will not with or without the giving of notice or the
passage of time or both, (a) violate or conflict with or result in a breach of
or a right of termination by any Person of any provision of, or constitute a
default under, or create a Lien upon any properties or assets of the Company or
any of its subsidiaries pursuant to (i) the Certificate of Incorporation or the
By-Laws of the Company or any of its subsidiaries or (ii) any order, judgment,
decree, statute, regulation, contract, agreement or any other restriction of any
kind or description to which the Company or any of its subsidiaries or its
assets may be bound or subject; (b) violate any applicable law, rule,
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regulation, judgment, injunction, order or decree binding upon the Company or
any of its subsidiaries or to which any of their properties and assets is
subject; (c) result in the loss or impairment of any approval, license,
franchise, permit, legal privilege or legal right enjoyed or possessed by the
Company or any of its subsidiaries; (d) otherwise result in the creation of any
Lien; or (e) require the consent or approval of any Person other than the
consent of the Board of Directors and those consents or approvals set forth in
Section 3.15. Neither the Company nor any of its subsidiaries is in violation of
or (with or without notice or lapse of time or both) in default under, any
material term or provision of its respective certificate of incorporation or
by-laws or any indenture, loan or credit agreement, note agreement, mortgage,
security agreement or other agreement, lease or other instrument, commitment or
arrangement to which the Company or any of its subsidiaries is a party or by
which the Company's or any of its subsidiaries assets are bound. 3.4 Fully Paid
and Non-Assessable. Upon issuance of the Preferred Stock and payment therefor
pursuant to the terms hereof, each share of Preferred Stock shall be duly
authorized, validly issued, fully paid and non-assessable and free and clear of
any and all Liens (other than those created by the Purchaser on such Preferred
Stock), and is not subject to any preemptive right, right of first refusal
created by the Company, redemption right or similar right that has not been
waived on or prior to the date of Closing, and upon conversion of the Preferred
Stock, each share of Common Stock issued upon such conversion shall have been
duly authorized and reserved for issuance and will be validly issued, fully paid
and non-assessable and free and clear of any and all Liens (other than those
created by the Purchaser on such Preferred Stock), and will not be subject to
any preemptive right, right of first refusal granted by the Company, redemption
right or similar right that has not been waived on or prior to the date thereof.
3.5 Compliance with Laws and Instruments.
(a) Copies of the certificate of incorporation and bylaws of the Company
and each of its subsidiaries which have been delivered to (or made available for
inspection by) the Purchaser prior to the execution of this Agreement are true
and complete and have not been amended or repealed (other than in connection
with the Certificate of Designation).
(b) The Company and each of its subsidiaries is, and their business has
been operated, in compliance with their respective certificate of incorporation
and bylaws and, in all material respects, all applicable laws, rules,
regulations, decrees, injunctions, judgments, orders, rulings, awards,
settlements and writs.
3.6 Qualification. The Company and each of its subsidiaries is duly
qualified or licensed to do business and is in good standing as a foreign
corporation in the State of New York. The Company is not and is not required to
be qualified to do business as a foreign corporation in any other jurisdiction
except where the failure to be so qualified would not individually, or in the
aggregate, have a Material Adverse Effect on the Company.
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3.7 Capital Stock.
(a) As of the date hereof and immediately prior to the Closing, the
authorized capital stock of the Company consists and will consist, respectively,
of (i) 2,000,000 shares of preferred stock, par value $.0001 per share, of which
93,458 shares shall be designated as Series A Preferred Stock of which no shares
are outstanding; and (ii) 150,000,000 shares of Common Stock of which:
(A) 3,780,424 shares are issued and outstanding;
(B) 2,291,441 shares are authorized for issuance under the Stock Option
Plans, of which 1,921,441 shares are reserved for issuance upon the
exercise of options granted and issuable by the Company thereunder;
(C) 1,200,000 shares are reserved for issuance upon the conversion of the
Preferred Stock; and
(D) No shares are reserved for issuance upon the exercise of warrants.
(b) All such outstanding shares of Common Stock and Preferred Stock and
other securities have been duly authorized and validly issued and are fully paid
and nonassessable and were issued in compliance with all applicable Federal and
state securities laws.
(c) Except as contemplated by this Agreement and as set forth in the SEC
Filings, the Company has no outstanding subscription, option, warrant, right of
first refusal, preemptive right, call, contract, demand, commitment, convertible
security or other instrument, agreement or arrangement of any character or
nature whatever under which the Company is or may be obligated to issue Common
Stock, Preferred Stock or any other equity security of any kind or which
otherwise relates to the Company's securities.
(d) Without limiting the generality of the foregoing and except as provided
herein, neither the Company nor any of its subsidiaries has granted or agreed to
grant any registration rights, including piggyback rights, to any Person.
3.8 Securities Laws. Subject to the accuracy of the representations and
warranties of the Purchaser contained in Section 4 hereof, the offer, issue and
sale of the Preferred Stock, and the shares of Common Stock issuable upon
conversion thereof, (i) are and will be exempt from the registration
requirements of the Securities Act and (ii) are and will be issued in compliance
with all applicable Federal and state securities laws. Neither the Company nor
any agent on its behalf has solicited or will solicit any offers to sell or has
offered to sell or will offer to sell all or any part of the Preferred Stock to
any Person or Persons other than the Purchaser or has taken or will take any
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other action that would require the Company to register the sale of such
Preferred Stock under the Securities Act.
3.9 Financial Statements; Liabilities.
(a) Included in the Form 10-Q for the six months ended June 30, 2002 ("Form
10-Q") are the Company's consolidated unaudited balance sheet (the "Balance
Sheet") as of June 30, 2002 (the "Balance Sheet Date"), and the consolidated
unaudited statement of operations for the six-month period then ended
("Operating Statement"). Included in its annual report on Form 10-K for the year
ended December 31, 2001 ("Annual Report") are the Company's consolidated audited
balance sheets as of December 31, 2001 and the consolidated audited statements
of operations, cash flow and changes of stockholders' equity for the period then
ended, together with the related report of Xxxxxx & Xxxxxxxx LLP, independent
certified public accountants (such year-end balance sheet, statement of
operations, cash flow and changes of stockholders' equity and report, together
with the Balance Sheet and Operating Statement, the "Financial Statements"). The
Financial Statements (including any notes thereto):
(i) are complete and correct in all material respects and are in accordance
with the books and records of the Company;
(ii) present fairly the consolidated financial condition, results of
operations and cash flows of the Company and its subsidiaries at the respective
dates therein specified and the results of operations and changes in financial
position of the Company and its subsidiaries for the respective periods therein
specified; and
(iii) were prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior accounting periods (except
that the unaudited financial statements are subject to year-end audit
adjustments which will not be material in amount and do not contain complete
footnotes).
(b) The Company and its subsidiaries have no liabilities or obligations of
any nature, either actual or absolute, contingent or otherwise, which are not
reflected or provided for in the Financial Statements or related notes except
liabilities included in the estimated loss from operations set forth in Section
3.9(c) of the Disclosure Schedule.
(c) The Company anticipates a loss from operations, during the quarter
ended September 30, 2002, as set forth in Section 3.9(c) of the Disclosure
Schedule.
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3.10 Changes. Since December 31, 2001, except as disclosed in the Form
10-Q, the Annual Report, or Section 3.9(c) of the Disclosure Schedule, there has
been no event which was has had, or could reasonably be expected to have, a
Material Adverse Effect. Since June 30, 2002, except as disclosed in Section
3.9(c) of the Disclosure Schedule, the Company and its subsidiaries have
conducted its business in all material respects in the ordinary course
consistent with past practices, and without limiting the generality of the
foregoing, there has not been any:
(a) change, occurrence or circumstance in or affecting the business,
assets, liabilities, financial condition, operations or prospects of the Company
or any of its subsidiaries that has had or may reasonably be expected to have a
Material Adverse Effect;
(b) resignation or termination of any key officers, employees or
consultants of the Company or any of its subsidiaries;
(c) material change, except in the ordinary course of business, in the
contingent obligations of the Company or any of its subsidiaries by way of
guaranty, endorsement, indemnity, warranty or otherwise which has had or may
reasonably be expected to have a Material Adverse Effect;
(d) damage, destruction or loss, whether or not covered by insurance, that
has had or may reasonably be expected to have a Material Adverse Effect on the
Company;
(e) waiver by the Company or any of its subsidiaries of a material right or
of a material debt owed to any of them which has had or may reasonably be
expected to have a Material Adverse Effect;
(f) direct or indirect loans or advances made by the Company or any of its
subsidiaries to any stockholder, employee, consultant, officer, director or
Affiliate of the Company or any of its subsidiaries, other than loans or
advances made in the ordinary course of business or, in the aggregate, not
exceeding $250,000;
(g) material change in any compensation arrangement or agreement with any
employee, consultant, officer, director or shareholder has had or may reasonably
be expected to have a Material Adverse Effect;
(h) declaration or payment of any dividend or other distribution of assets
of the Company or any of its subsidiaries or any direct or indirect redemption,
purchase, retirement or other acquisition of any shares of its capital stock has
had or may reasonably be expected to have a Material Adverse Effect;
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(i) debt, obligation or liability incurred, assumed or guaranteed by the
Company or any of its subsidiaries, except those for amounts not exceeding
$250,000 in the aggregate or for current liabilities incurred in the ordinary
course of business;
(j) sale, assignment or transfer of any of the assets or rights of the
Company or any of its subsidiaries (other than the sale of their respective
inventory in the ordinary course of business), including patents, trademarks,
copyrights, trade secrets or other intangible assets or intellectual property,
or any mortgage or pledge of or Lien imposed upon any of the assets or
properties of the Company or any of its subsidiaries, except in the ordinary
course of business except any such sales, assignments, transfers, mortgages,
pledges or liens which, in the aggregates, have had, or may reasonably be
expected to have, a Material Adverse Effect;
(k) change in or event of default under any material agreement to which the
Company or any of its subsidiaries is a party or by which any of them is bound
which modification or event of default has had or may reasonably be expected to
have, a Material Adverse Effect;
(l) purchase or other acquisition of any operating business or a material
amount of assets or the capital stock of any other Person; or
(m) other event or condition of any character that, either individually or
cumulatively, has had or may reasonably be expected to have a Material Adverse
Effect.
3.11 Material Agreements of the Company. Neither the Company nor any of its
subsidiaries is a party to or otherwise bound by any written or oral agreement,
instrument or arrangement that is material to the Company except for those
agreements included as exhibits to, or disclosed in the Annual Report, the Form
10-Q or any other documents filed with the Commission (the "Material
Contracts"). The Company has furnished or made available to the Purchaser true
and complete copies of all such agreements and all other agreements, instruments
and other documents requested by the Purchaser or its authorized representative.
Neither the Company nor any of its subsidiaries, and to the Company's best
knowledge, any other party to a Material Contract, is in default of any Material
Contract. Each Material Contract is in full force and effect. To the best of the
Company's knowledge, IBM has not notified the Company of its intention to modify
or amend in any material respect the Material Contracts between the Company and
IBM.
3.12 Litigation. Except as disclosed in the Form 10-Q, there is no action
pending and, to the best knowledge of the Company, there is no action threatened
against the Company or any of its subsidiaries or any of their respective
directors, officers or employees or to which any of the properties or assets of
the Company or any of its subsidiaries is subject or which challenges the
validity of any Transaction Document, the issuance of the Preferred Stock or any
action taken or to be taken pursuant hereto or thereto, which seeks to impose or
confirm any limitation on the ability of the Purchaser effectively to acquire,
hold or exercise full rights of ownership of the Preferred Stock or the shares
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of Common Stock issuable upon conversion thereof, which action, in the aggregate
with all other such investigations, claims, actions and proceedings would have a
Material Adverse Effect. Except as disclosed in the Form 10-Q or the Annual
Report or any other SEC Filing, neither the Company nor any of its subsidiaries
is a party or is subject to the provisions of any order, writ, judgment,
injunction, decree, determination or award of any court or of any governmental
entity or regulatory authority. Except as disclosed in the Annual Report, the
Form 10-Q or any press release of the Company, there is no action, suit,
proceeding or investigation by the Company or any of its subsidiaries currently
pending which has had, or if finally determined in a manner adverse to the
Company could reasonably be expected to have, a Material Adverse Effect.
3.13 Disclosure. The representations and warranties of the Company
contained herein, when read together with the Form 10-Q and the Annual Report,
do not contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading.
3.14 Intellectual Property.
(a) Section 3.14(a) of the Disclosure Schedule contains a list of all
material Intellectual Property Rights (as defined below) including all material
licenses and sublicenses (whether as licensee, sublicensee, licensor or
sublicensor) and other agreements as to which the Company or any of its
subsidiaries is a party and pursuant to which any Person is authorized to use
any such Intellectual Property Right, including the identity of all parties
thereto. As used herein, the term "Intellectual Property Right" means any and
all material trademarks, service marks, and trade names, patents, copyrights
(whether or not registered and whether or not published), (including any
registrations or applications for registration of any of the foregoing) or any
other material Intellectual Property Right, in any country or jurisdiction in
the world, in each case which is owned or licensed by and either used or held
for use or otherwise related and material to the conduct of the business of the
Company.
(b) Except as indicated in any of the SEC Filings, (i) the Company owns or
has the legally enforceable right to use, sell, execute, reproduce, display,
perform, modify, enhance, distribute, prepare derivative works of, and license
and sublicense without further payment to any other Person, all material
Intellectual Property Rights, free and clear of all Liens; (ii) the execution,
delivery and performance of the Transaction Documents will not conflict with,
result in a breach of, constitute an event of default under (or an event that,
with notice or lapse of time or both, would constitute a conflict, breach or
default under), or accelerate the performance required by, or create in any
Person the right to accelerate, terminate, modify, or cancel (with notice or
lapse of time or both), or require any notice under, any contract involving any
Intellectual Property Rights, which default, conflict, breach or event has had,
or may reasonably be expected to have, a Material Adverse Effect, and will not
cause the forfeiture or termination of or give rise to a right of forfeiture or
termination (with notice or lapse of time or both) of any Intellectual Property
14
Rights or otherwise impair the rights of the Company to use, sell or license any
Intellectual Property Rights which forfeiture, termination, right of forfeiture
or termination or impairment has had, or could reasonably be expected to have, a
Material Adverse Effect.
(c) Except as indicated in any of the SEC Filings or set forth in Section
3.14(c) of the Disclosure Schedule, (i) all current and former employees,
officers and consultants of the Company (including the Principal Stockholders)
that, during the term of such Persons' respective employment or consultancy with
the Company has contributed to or participated in the conception and development
of products currently offered by the Company and the products which the Company
proposes to offer have acted during such respective terms within the scope of
their employment in so contributing or participating; and (ii) no current and
former officers, employees or consultants of the Company has a right to claim an
ownership interest in any Intellectual Property Rights as a result of having
been involved in the development, creation or licensing of any Intellectual
Property Rights while employed or serving as consultants to the Company which
claim has had or could reasonably be expected to have a Material Adverse Effect.
(d) Except as indicated in the SEC Filings, (i) the Company has not been
sued or charged with or otherwise been notified of, or been a party in any
claim, suit, action or proceeding relating to its business that has not been the
subject of a final disposition prior to the date hereof and that involves a
claim of interference, infringement, misappropriation or opposition by the
Company of any trademark, patent, trade secret, copyright, know-how or other
proprietary information or intellectual property right of any other Person which
claim, if subject of a final disposition adverse to the Company, could
reasonably be expected to have a Material Adverse Effect, and the Company has no
knowledge of any reasonable basis for any such claims, (ii) the Company has no
knowledge of any interference, infringement, misappropriation or opposition by
any other Person of any Intellectual Property Rights which interference,
infringement, misappropriation or opposition could reasonably be expected to
have a Material Adverse Effect; (iii) no Intellectual Property Right is subject
to any outstanding order, judgment, injunction, decree, stipulation or agreement
prohibiting or restricting the use thereof by the Company or prohibiting or
restricting the assignment, licensing or transfer thereof by the Company to any
Person which has had or could reasonably be expected to have a Material Adverse
Effect; (iv) no Intellectual Property Rights are currently the subject of any
re- examination, opposition, cancellation or invalidation proceeding before any
governmental authority which re-examination, opposition, cancellation or
invalidation proceeding could reasonably be expected to have a Material Adverse
Effect, and all Intellectual Property Rights registered or, to the best
knowledge of the Company, filed with a governmental authority are currently in
compliance with all material formal legal requirements and, to the best
knowledge of the Company, are valid and enforceable; and (v) the Company has not
entered into any agreement to indemnify any other Person against any charge of
infringement or misappropriation of any Intellectual Property Right or other
proprietary information or intellectual property right of any other Person.
15
(e) With respect to software licensed to the Company from third parties,
such as operating systems and databases required by the Company to deliver
services to its customers, to the best of the Company's knowledge, all such
licenses are in good standing and the Company is authorized to deliver such
services to its customers, except to the extent that the failure of any license
or licenses to be in good standing or the absence of such authorization would
not have, or could not reasonably be expected to have, a Material Adverse
Effect.
(f) To the best of the Company's knowledge, none of the operations of the
Company involves the unlicensed or unauthorized use of confidential or
proprietary information. The Company has taken all reasonable measures to
protect the trade secrets and the confidential and proprietary information of
third Persons used in or related to the Company's operations. To the best of the
Company's knowledge, to the extent that information of a confidential nature has
been used in the operations of the Company in the five year period prior to the
date hereof, such information (except insofar as it has fallen into the public
domain through no fault of the Company or is not material) has been kept
strictly confidential and has not been disclosed otherwise than subject to an
obligation of confidentiality being imposed on the Person to whom such
information was disclosed.
3.15 No Governmental Consent or Approval Required. Assuming the truth and
accuracy of the representations made by the Purchaser in Section 4 hereof, no
authorization, consent, approval or other order of, declaration to, or
registration, qualification, designation or filing with, any federal, state or
local governmental agency or body is required by or from the Company for the
valid and lawful authorization, execution and delivery by the Company of the
Transaction Documents and consummation of the transactions contemplated hereby
or thereby, or for the valid and lawful authorization, issuance, sale and
delivery of the Preferred Stock or for the valid and lawful authorization,
reservation, issuance, sale and delivery of the Preferred Stock, other than (i)
the filing of the Certificate of Designation with the Secretary of State of the
State of Delaware and (ii) the qualification (or taking of such action as may be
necessary to secure an exemption from qualification, if available) of the offer
and sale of the Preferred Stock under applicable state and Federal securities
laws, which filings and qualifications, if required, will be accomplished in a
timely manner so as to comply with such qualification or exemption from
qualification requirements.
3.16 Nasdaq Listing Compliance. The Company's Common Stock is registered
pursuant to Section 12(g) of the Exchange Act and is listed on the Nasdaq Small
Cap Market and the Company has taken no action designed to, or likely to have
the effect of, terminating the registration of the Common Stock under the
Exchange Act or de-listing the Common Stock from the Nasdaq Small Cap Market. In
addition, except for the correspondence from NASDAQ to the Company on August 20,
2002, a copy of which has been previously provided to the Purchaser, the Company
has not received any notification from the Commission or NASDAQ indicating that
the Company is subject to or in risk of being delisted from the Nasdaq SmallCap
Market.
16
3.17 Reporting Status. Except as otherwise set forth in Section 3.17 of the
Disclosure Schedule, the Company has filed in a timely manner all forms, reports
and other documents that the Company was required to file under the Exchange Act
and the Securities Act during the 12 months preceding the date of this Agreement
and such documents complied as to form in all material respects with the
Commission's requirements as of their respective filing dates, and the
information contained therein as of the respective dates thereof did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein in
light of the circumstances under which they were made not misleading.
3.18 Compliance with Nasdaq Requirements. The Company has complied with all
requirements of Nasdaq, Inc. with respect to the issuance of the Preferred Stock
and the shares of Common Stock issuable upon conversion thereof and agrees to
file a listing application with NASDAQ covering such common stock in compliance
with applicable NASD rules.
3.19 Eligibility to File Form S-3. The Company is currently eligible to
register the resale of Common Stock in a secondary offering on a registration
statement on Form S-3 under the Securities Act.
3.20 Subsidiaries. Except as set forth in the SEC Filings, (i) the Company
does not have, and is not committed to purchase or acquire, any equity interest
or equivalent interest (direct or indirect) in any Person other than the
subsidiaries of the Company listed therein, (ii) all outstanding shares of
capital stock of each subsidiary are owned of record and beneficially solely by
the Company and have been duly authorized and validly issued and are fully paid
and non- assessable and (iii) the Company owns all of the issued and outstanding
capital stock of each of its subsidiaries free and clear of any and all Liens.
3.21 Brokerage. No placement agent, banker, broker or finder has acted
directly or indirectly for the Company in connection with this Agreement or the
transactions contemplated hereby, and no placement agent, banker, broker or
finder is entitled to any commission, brokerage or finder's fee in respect
thereof based in any way on agreements, arrangements or understandings made by
or on behalf of the Company.
3.22 Employees. Neither the Company nor any of its subsidiaries has a
collective bargaining agreement with any of its employees. There is no labor
union organizing activity pending or, to the Company's best knowledge,
threatened with respect to the Company or any of its subsidiaries. Except as
disclosed in any of the SEC Filings, to the Company's best knowledge, no
employee of the Company or any of its subsidiaries, nor any consultant with whom
the Company or any of its subsidiaries has contracted, is in violation of any
term of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company or any such subsidiary because of the nature of the
business to be conducted by the Company or any such subsidiary; and, to the
Company's best knowledge, the continued employment by the Company and each
17
subsidiary of its current officers and significant employees, will not result in
any such violation. Except as disclosed in any of the SEC Filings: the Company
and each of its subsidiaries have not received any written notice alleging that
any such violation has occurred;. and no employee of or consultant to the
Company or any of its subsidiaries has been granted the right to continued
employment by the Company or such subsidiary or to any material compensation
following termination of employment with or by the Company or such subsidiary.
3.23 Taxes. "Taxes" shall mean all taxes, charges, fees, Liens, duties or
other assessments, however denominated, including any interest or penalties that
may become payable in respect thereof, imposed by the United States government,
any state, local or foreign government or any agency or political subdivision of
any such government (a "Tax Authority"), which shall include, without limiting
the generality of the foregoing, all income taxes, payroll and employee
withholding taxes, unemployment insurance, social security, sales and use taxes,
excise taxes, capital taxes, franchise taxes, gross receipt taxes, occupation
taxes, real and personal property taxes, value added taxes, stamp taxes,
transfer taxes, workers' compensation taxes and other obligations of the same or
of a similar nature. All tax returns or reports required to be filed by or on
behalf of the Company or any of its subsidiaries have been timely filed or
requests for extensions have been timely filed or any amounts due and unpaid
have been accrued on the Financial Statements and, to the best knowledge of the
Company, any such extension has been granted and has not expired, and all such
filed returns are complete and accurate in all material respects. All Taxes due
from the Company or any of its subsidiaries through the date hereof have been
paid in full or an adequate provision has been made for any such Taxes on the
Financial Statements (in accordance with generally accepted accounting
principles). Except as otherwise disclosed in any of the SEC Filings: there is
no audit, examination, deficiency, or refund litigation pending or threatened,
with respect to any Taxes of the Company or any of its subsidiaries; all Taxes
due with respect to completed and settled examinations or concluded litigation
relating to it have been paid in full or adequate provision has been made for
any such Taxes on the Financial Statements (in accordance with generally
accepted accounting principles); the Company has not executed an extension or
waiver of any statute of limitations on the assessment or collection of any Tax
that is currently in effect; and no rulings have been issued by or agreements
entered into with any Tax Authority with respect to the Company or any of its
subsidiaries.
3.24 ERISA and Employee Benefit Plans.
(a) Except as disclosed in any of the SEC Filings, neither of the Company
nor any of its subsidiaries maintains, sponsors, is required to make
contributions to or otherwise has any liability, direct, indirect, contingent or
otherwise, with respect to any pension, profit sharing, thrift or other
retirement plan, employee stock ownership plan, deferred compensation, stock
18
ownership, stock purchase, performance share, bonus or other incentive plan,
severance plan, health or group insurance plan, welfare plan, or other similar
plan, agreement, policy, arrangement or understanding, whether written or oral,
whether or not such plan is intended to be qualified under Section 401(a) of the
Code, including any employee benefit plan within the meaning of Section 3(3) of
ERISA, which plan covers any employee or former employee of the Company or any
of its subsidiaries (collectively, the "Plans").
(b) The Company has delivered to the Purchaser, or the same are available
as exhibits to or are disclosed into reports, registration statements, proxy
statements or other filings made by the Company with the Commission, true,
correct and complete copies of each of the following:
(i) any employment agreements and any procedure and policy manuals relating
to the employment of employees of the Company and each of its subsidiaries and
the use of temporary employees and independent contractors by the Company and
each of its subsidiaries;
(ii) each Plan and all related trust agreements, insurance and other
material contracts, and summary plan descriptions and summaries of material
modifications relating to each Plan and any related material communications
distributed to participants under the Plans; and
(iii) the latest reports which have been filed (or are in fully completed
form for filing) with the Internal Revenue Service and the Department of Labor
with respect to each Plan.
(c) With respect to each Plan, to the best knowledge of the Company, no
party in interest or disqualified person (as defined in Section 3(14) of ERISA
and Section 4975 of the Code, respectively) has at any time engaged in a
transaction which could subject the Company or any of its subsidiaries to a Tax
in a material amount for prohibited transactions imposed by ERISA or Section
4975 of the Code.
(d) To the best knowledge of the Company, no fiduciary (as defined in
Section 3(21) of ERISA) with respect to any Plan has breached any of the
material responsibilities or obligations imposed upon fiduciaries under Title I
of ERISA. Each Plan is and has been operated in compliance in all material
respects with its terms and all applicable reporting, disclosure and other
requirements of ERISA and the Code as they relate to such Plan, including where
applicable, the group health plan continuation coverage requirements set forth
in Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code, and
by its terms can be terminated at any time.
19
(e) As of the date hereof, the Company and each of its subsidiaries shall
have made all required contributions under each Plan for all applicable periods
or adequate accruals therefor will have been provided for by the Company or such
subsidiary.
(f) Except as set forth in any of the SEC Filings, no Person will be
entitled to any severance benefits under the terms of any Plan solely by reason
of the transactions contemplated by this Agreement or the Stockholders
Agreement. Except as otherwise disclosed in any of the SEC Filings, there are no
actions, claims, suits or arbitrations pending or, to the best knowledge of the
Company, threatened with respect to any Plan, which actions, claims, suits or
arbitrations has or could reasonably be expected to have, alone, or in the
aggregate, a Material Adverse Effect.
(g) Neither the Company nor any of its subsidiaries has incurred any
outstanding liability in any material amount to the Pension Benefit Guaranty
Corporation. Each Plan which is intended to be "qualified" within the meaning of
Section 401(a) of the Code (and the exempt trust thereunder), has been
determined by the Internal Revenue Service to satisfy the qualification
requirements of Sections 401(a) and 501(a) of the Code and every Plan (and
related trust) which is intended to comply with the terms and requirements of
applicable statutes does so comply in all material respects.
(h) Neither the Company nor any of its subsidiaries, other than Softworks,
Inc., has adopted, during the last six (6) years, any Plan or any employee
benefit plan subject to Title IV of ERISA, giving rise to any liabilities to
which the Company or any of its subsidiaries is now or may hereafter be subject,
which liabilities have, or could reasonably be expected to have, a Material
Adverse Effect.
(i) The consummation of the transactions contemplated by this Agreement and
the Stockholders Agreement will not result in an increase in the amount of
compensation or benefits or accelerate the vesting or timing of payment of any
benefits or compensation payable in respect of any employee.
3.25 Transactions with Related Persons. Except as otherwise disclosed
herein, in the Disclosure Schedule or any of the SEC Filings:
(a) Neither the Company nor any of its subsidiaries has entered into any
agreement with, and no debts, obligations or liabilities of the Company or any
of its subsidiaries is owed to, any of their respective officers, directors,
shareholders, employees, consultants or Affiliates or any Affiliate thereof
other than:
(i) for payment of salary, consulting or director's fees for services
rendered;
20
(ii) reimbursement for reasonable expenses incurred on behalf of the
Company or any such subsidiary; and
(iii) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the board of directors either of the Company or any of its
subsidiaries);
(b) None of the officers, directors or stockholders of the Company or any
of its subsidiaries, or any members of their immediate families or any of their
Affiliates, is indebted to, or has any cause of action or legal claim against,
the Company or any of its subsidiaries or, to the best knowledge of the Company,
has any direct or indirect ownership interest in any Person with which the
Company or any of its subsidiaries is affiliated or with which the Company or
any of its subsidiaries has a business relationship, or any Person which
competes with the Company or any of its subsidiaries, except that officers,
directors and/or stockholders of the Company or any of its subsidiaries may own
less than two percent (2%) of the issued and outstanding capital stock in
publicly traded companies which may compete with the Company or any of its
subsidiaries;
(c) No officer, director or stockholder of the Company or any of its
subsidiaries, or any member of their immediate families or any of their
Affiliates, is, directly or indirectly, interested in any material contract with
the Company or any of its subsidiaries; and
(d) Neither the Company nor any of its subsidiaries is a guarantor,
indemnitor or contributor of any indebtedness or liability of any other Person
involving any guaranty, indemnification or contribution required to be disclosed
in any such SEC Filings.
3.26. Title to Properties and Assets; Liens, etc.
(a) Except as otherwise disclosed in the SEC Filings, the Company and each
of its subsidiaries has good and marketable title to its material properties and
assets, and good title to its material leasehold estates, in each case subject
to no material Liens, other than (i) those identified on the Balance Sheet, (ii)
those resulting from taxes which have not yet become delinquent, (iii) minor
Liens which do not materially detract from the value of the property or
materially impair the operations of the Company or such subsidiary and (iv)
those that have otherwise arisen in the ordinary course of business.
(b) All material facilities, machinery, equipment, fixtures, vehicles and
other properties owned, leased or used by the Company and each of its
subsidiaries are in good operating condition and repair and are reasonably fit
and usable for the purposes for which they are being used.
(c) The SEC Filings sets forth true, complete and correct descriptions of
each leasehold interest of the Company and each of its subsidiaries in real
21
property that is material to the business and operations of the Company and its
subsidiaries, taken as a whole. The Company and each of its subsidiaries enjoys
peaceful and undisturbed possession of all such real property.
(d) Neither the Company nor any of its subsidiaries has ever owned, nor
does the Company nor any of its subsidiaries or currently own any real property.
(e) Except as set forth in the SEC Filings, the Company has never
manufactured or produced, and does not presently manufacture or produce, any of
its products or goods and such products and goods have been and are presently
manufactured and produced by independent third Persons.
3.27 Permits. The Company and each of its subsidiaries has all franchises,
permits, licenses, consents and approvals and any similar authorization required
for their operations, the absence of which could not be reasonably expected to
have alone, or in the aggregate, a Material Adverse Effect, and all
authorizations they have are in full force and effect.
3.28. Environmental Matters.
(a) As used herein, "Subject Premises" means the real property now owned,
operated, used or leased or previously owned, operated, used or leased (but only
through the date of termination of such ownership, operation, use or lease) by,
to or for the Company or any of its subsidiaries.
(b) To the best knowledge of the Company, none of the Subject Premises has
any condition or conditions which would require notification or remediation by
the Company or any of its subsidiaries under any Environmental Law
(collectively, "Environmental Defects").
(c) Neither the Company nor any of its subsidiaries, nor, to the Company's
best knowledge, any other Person has at any time during its possession of the
Subject Premises disposed of any wastes, Hazardous Waste or otherwise, other
than in accordance with applicable Environmental Laws and Environmental Permits.
(d) Neither the Company nor any of its subsidiaries has received any
written communication from the Federal Environmental Protection Agency or any
other local, state or Federal regulatory agencies or any other Person relating
to the existence of Environmental Defects at the Subject Premises.
(e) Except as disclosed in any of the SEC Filings, to the best knowledge of
the Company, there do not exist any judgments, orders, directives, decrees or
awards of any court, arbitrator or administrative or governmental agency or
entity or any other Person concerning the Company or any of its subsidiaries or
any of their agents' or contractors' compliance with any Environmental Law or
Environmental Permit (in the case of agents and contractors, relating to the
Company, any of its subsidiaries or the Subject Premises).
22
(f) Except as disclosed in any of the SEC Filings, no claims have been
asserted or, to the best knowledge of the Company, are threatened against the
Company or any of its subsidiaries relating to any Environmental Defect or
condition which with the passage of time could become an Environmental Defect.
(g) Except as disclosed in any of the SEC Filings, to the best knowledge of
the Company, there do not exist any consent decrees, administrative orders,
settlement agreements or other settlement documents entered into with any
administrative or governmental agency or entity or any other Person concerning
compliance with any Environmental Law or Environmental Permit applicable to the
Company or any subsidiary or any of the Subject Premises.
(h) Except as disclosed in any of the SEC Filings, the Subject Premises and
all operations conducted thereon by the Company or any of its subsidiaries are
and have at all times been in compliance in all material respects with all
Environmental Laws and Environmental Permits.
(i) The Company and each of its subsidiaries have obtained and currently
maintain in full force and effect all material environmental permits, approvals,
authorizations, licenses, variances, registrations and permissions
(collectively, "Environmental Permits") required for the conduct of their
respective businesses and operations.
(j) To the best knowledge of the Company, there are no Hazardous Substances
or Hazardous Waste on, under or about the Subject Premises other than those
customarily used in or incident to the business of the Company or any of its
subsidiaries, which in any event are used or maintained by the Company or its
subsidiaries in all material respects in accordance with all applicable
Environmental Laws and Environmental Permits.
3.29 Customers and Suppliers. Except as disclosed on in the SEC Filings, no
customer or supplier of the Company or any of its subsidiaries has taken, and
the Company has not received any written notice, and the Company does not have
any knowledge that any customer or supplier of the Company contemplates taking,
any steps that could disrupt the business relationship of the Company with such
customer or supplier or could result in a diminution in the value of the Company
in a manner that, in either event, would be reasonably likely to have a Material
Adverse Effect. The Company has no knowledge of any activities by ex-employees
that have disrupted the business relationship of the Company with its customers
or suppliers in any material respect.
3.30 Rights Agreement; Interested Stockholder. All necessary and proper
action has been taken by the Company and its Board of Directors such that the
23
execution, delivery and performance of the Transaction Documents, the purchase,
sale and issuance of the Series A Preferred Stock and, the issuance of the
Common Stock upon conversion of the Series A Preferred Stock, will not (a) give
rise to the exercise of the rights issued under the Rights Agreement, dated as
of August 28, 2001, between the Company and Manhattan Transfer Registrar
Company, or (b) cause the Purchaser to become an "interested stockholder" under
Section 203 of the Delaware General Corporation Law.
3.31 Directors and Officers Insurance. The Company has furnished to the
Purchaser a true, correct and complete copy of the Company's directors and
officers insurance policy. There is no claim by the Company or any of its
directors or officers pending under such policy as to which coverage has been
questioned, denied or disputed by the underwriters of such policy. All premiums
due and payable under such policy have been paid and the Company have in all
material respects complied fully with the terms and conditions of such policy.
Such policy is in full force and effect. Such policy is in the coverage amount
of $7 million. The Company knows, to its best knowledge, of no threatened
termination of such policy.
4. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Company as of the date of this Agreement as
follows:
4.1 Status. The Purchaser is a limited partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full power and authority to execute, deliver and perform its
obligations under this Agreement and each of the other Transaction Documents to
which the Purchaser is a party.
4.2 Authority. The Purchaser has the power and authority to execute and
deliver the Transaction Documents to which it is a party and to carry out its
obligations hereunder and thereunder. The execution, delivery and performance by
the Purchaser of the Transaction Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary limited partnership action on the part of the
Purchaser, and the Transaction Documents to which the Purchaser is a party
constitute the legal, valid and binding obligation of the Purchaser, enforceable
against the Purchaser in accordance with their respective terms, except as the
same may be limited by bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally now or hereafter in
effect and subject to the application of equitable principles and the
availability of equitable remedies.
4.3 No Conflicts. The execution, delivery and performance of the
Transaction Documents to which the Company is a party and the consummation of
the transactions contemplated hereby and thereby by the Purchaser do not and
will not with or without the giving of notice or the passage of time or both,
violate or conflict with or result in a breach or termination of any provision
of, or constitute a default under any organizational instrument of the Purchaser
or any order, judgment, decree, statute, regulation, contract, agreement or any
other restriction of any kind or description to which the Purchaser is a party
or by which the Purchaser is or may be bound.
24
4.4 Investor Representations and Acknowledgments.
(a) The Purchaser is acquiring the Preferred Stock for the Purchaser's own
account for investment only and not as nominee or agent and not with a view to,
or for sale in connection with, a distribution of the Preferred Stock or the
shares of Common Stock issuable upon conversion thereof and with no present
intention of selling, transferring, granting a participation in or otherwise
distributing, the Preferred Stock or the shares of Common Stock issuable upon
conversion thereof, all within the meaning of the Securities Act and any
applicable state, securities or blue-sky laws.
(b) The Purchaser is not a party or subject to or bound by any contract,
undertaking, agreement or arrangement with any Person to sell, transfer or
pledge the Preferred Stock or any part thereof to any Person, and has no present
intention to enter into such a contract, undertaking, agreement or arrangement.
(c) The Purchaser acknowledges that:
(i) The Company has advised the Purchaser that neither the Preferred Stock
nor the shares of Common Stock issuable upon conversion thereof have been
registered under the Securities Act or under the laws of any state on the basis
that the issuance thereof contemplated by this Agreement is exempt from such
registration in accordance with Section 4(2) of the Securities Act;
(ii) The Company's reliance on the availability of an exemption under the
Securities Act for the issuance of the Preferred Stock and the shares of Common
Stock issuable upon conversion thereof without registration is, in part, based
upon the accuracy and truthfulness of the Purchaser's representations contained
herein;
(iii) The Preferred Stock and the shares of Common Stock issuable upon
conversion thereof cannot be resold without registration or an exemption from
registration under the Securities Act and any applicable state securities laws,
and that certificates representing the Preferred Stock and the shares of Common
Stock issuable upon conversion thereof will bear a restrictive legend to such
effect in substantially the following form;
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED
FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT.
25
(iv) The Purchaser has evaluated the merits and risks of purchasing the
Preferred Stock, and has such knowledge and experience in financial and business
matters that the Purchaser is capable of evaluating the merits and risks of such
purchase, is aware of and has considered the financial risks and hazards of
purchasing the Preferred Stock, and is able to bear the economic risk of
purchasing the Preferred Stock, including the possibility of a complete loss
with respect thereto;
(v) The Purchaser has had access to such information regarding the business
and finances of the Company, and has been provided the opportunity to discuss
with the Company's management the business, affairs and financial condition of
the Company and such other matters with respect to the Company as would concern
a reasonable person considering the transactions contemplated by this Agreement
and/or concerned with the operation of the Company;
(vi) The representations and warranties of the Purchaser set forth herein
are true, correct and complete as of the date of this Agreement, and will be
true, complete and correct on the date of closing of the purchase and sale of
the Preferred Stock pursuant to the terms hereof, provided, however, if there
should be any material change in the information underlying such representations
and warranties at any time prior to such closing the Purchaser shall immediately
furnish such revised or corrected information to the Company; and
(vii) The Purchaser, by initialing the paragraphs in (a) through (g) below
applicable to the Purchaser, hereby represents and warrants that the Purchaser
is an Accredited Investor, because the Purchaser comes within one or more of the
enumerated categories set forth in (a) through (g) below. Check the box provided
in the beginning of each applicable paragraph, thereby representing and
warranting as to the applicability to the Purchaser of the checked paragraph or
paragraphs:
[ ] A bank as defined in Section 3(a)(2) of the Securities Act, or a
savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act, whether acting in its
individual or fiduciary capacity; a broker or dealer registered
pursuant to Section 15 of the Exchange Act; an insurance company as
defined in Section 2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940 (the "Investment
Company Act") or a business development company as defined in Section
2(a)(48) of the Investment Company Act; a Small Business Investment
Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958; a
plan established and maintained by a state, its political subdivisions
or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; an employee benefit plan within the
meaning of the Employee Retirement Income Security Act of 1974
("ERISA"), if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of ERISA, which is either a bank, savings and
26
loan association, insurance company, or registered investment advisor,
or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made
solely by persons that are accredited investors.
[ ] A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[x] An organization described in Section 501(c)(3) of the Code,
corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000.
[ ] A director or executive officer of the Company.
[ ] A natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his or her purchase exceeds
$1,000,000.
[ ] A natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the
current year.
[ ] A trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) (i.e., a person who has such knowledge and experience in
financial and business matters that he is capable of evaluating the
merits and risks of the prospective investment).
[ ] An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, the Purchaser must
identify each equity owner and provide statements signed by each
demonstrating how each is qualified as an accredited investor.)
(d) As long as the Purchaser or its affiliates owns any shares of Series A
Preferred Stock or Common Stock, neither the Purchaser nor its affiliates shall,
directly or indirectly, engage in any form of "short" sales of any shares of
Common Stock, whether "covered" or "uncovered" short sales, or engage in any
transaction, the purpose of which is to effectuate a short sale of or a sale
27
with a declared delivery (more than three days from the actual sale) of any of
the shares sold.
5. Certain Covenants of the Company.
--------------------------------
5.1 Board Designee
(a) The Company hereby covenants and agrees that all times during which the
Purchaser owns not less than the Threshold Percentage, provided that the Company
then has a classified Board of Directors, the Purchaser shall have the right to
designate one director to the Company's Board of Directors (the "Purchaser
Designee"), which right shall not be assigned without the prior written consent
of the Company. The Company agrees that on or prior to the date hereof, it will
fill the current vacancy on its Board of Directors in Class II by appointing
Xxxxx X. Xxxxxx as a director thereto, to serve on the Board of Directors until
the annual meeting of stockholders in 2004 and until his successor is duly
elected and qualified or his earlier resignation or removal. The Company further
agrees that it shall nominate Xx. Xxxxxx, or such other Person designated by the
Purchaser and acceptable to the Board of Directors in the good faith exercise of
its reasonable business judgment, to the slate of the Company's nominees for
election as Class II directors of the Company at the Company's annual meeting of
stockholders in 2004 and that in the event Xx. Xxxxxx shall resign or be removed
from the Board of Directors prior thereto, that the Company will fill the
vacancy in Class II members of its Board with another Person designated by the
Purchaser and acceptable to the Board of Directors in the good faith exercise of
its reasonable business judgment. Notwithstanding anything contained in this
Section 5.1 to the contrary, at any time during which the Company does not
maintain a classified board of directors, so long as the Purchaser owns the
Threshold Percentage, the Company shall comply with the provisions of this
Section 5.1 to appoint the Purchaser Designee to the Board of Directors as then
composed.
(b) The Company agrees to use its best efforts to cause the Purchaser
Designee to be nominated to the Board of Directors of the Company for election
to such Board (and any committees of the Board, to the extent deemed appropriate
by the non-Purchaser Designee members of the Board) by the Company's
stockholders at the time and in the manner provided for such nomination and
election in the Company's bylaws and certificate of incorporation. For as long
as the Purchaser owns not less than the Threshold Percentage, the Purchaser
Designee may not be removed or replaced without the Purchaser's prior written
consent, except for any removal of such individual for Cause (but subject to the
rights of the Purchaser to fill such vacancy and of the Board of Directors to
except the Purchaser's designee as provided herein).
(c) The Company shall also use its best efforts to cause its Board of
Directors to take all necessary and appropriate action to effect the election of
the Purchaser Designee pursuant to the terms of this Section 5.1.
28
(d) The Company agrees that the Purchaser Designee shall be entitled to and
shall receive the same compensation as other members of the Board of Directors
receive for serving on the Board of Directors.
(e) Anything contained in this Section 5.1 to the contrary notwithstanding,
neither the Company nor its Board of Directors shall have any obligation under
this Section to do any act or thing which violates any provision of Delaware
law, the Exchange Act, the proxy rules or any other rules or regulations
promulgated under the Exchange Act or any other applicable Federal or state
securities laws, rules or regulations.
5.2 Incurrence of Indebtedness; Right of First Refusal.
(a) If, at any time when the Purchaser owns the Threshold Percentage, and
at least 25% of the Preferred Stock, the Company desires to incur any
indebtedness (other than Senior Indebtedness), the Company shall deliver a
written notice to the Purchaser of the Company's good faith desire to incur such
indebtedness, specifying the amount of indebtedness the Company desires to incur
and a detailed explanation for the reason it desires to incur such indebtedness
(the "Offer Notice"). The Offer Notice shall set forth the principal amount of
the desired indebtedness, the term, the facilities for payment, schedule of
payments, interest rate, and any other material terms and conditions of the
desired indebtedness.
(b) As promptly as practicable but in no event later than 15 calendar days
after receipt of an Offer Notice (the "Offer Period"), the Purchaser shall have
the right, but not the obligation, to elect to provide the Company with all the
financing so desired by the Company in accordance with such Offer Notice. If the
Purchaser elects to provide such financing to the Company, the Purchaser shall
give written notice to the Company, prior to the expiration of the Offer Period,
of the Purchaser's election to provide such financing to the Company (a "Funding
Notice").
(c) Any financing to be provided by the Purchaser pursuant to this Section
5.2 shall close within fifteen (15) calendar days after the date of the
applicable Funding Notice. The Company and the Purchaser shall enter into an
agreement to effect such transaction on the terms and conditions set forth in
the Offer Notice and with such representations, warranties, covenants,
conditions and indemnities as are customary under the circumstances and
otherwise commercially reasonable.
(d) In the event the Purchaser declines (by written notice declining the
offer pursuant to the Offer Notice) or shall fail to provide a Funding Notice
prior to the expiration of the Offer Period (the "Date of Rejection"), then the
Company shall have the right to engage in a transaction pursuant to the terms
set forth in the Offer Notice at any time within 45 days after the Date of
Rejection (the "Sale Period") upon terms and conditions no more favorable to
such party than those specified in the Offer Notice.
29
(e) For the purposes of this Section 5.2, "terms and conditions no more
favorable" shall mean that the price, facilities for payment, schedule of
payments, interest rates, indemnification provisions and any other material
terms and conditions of the agreement pursuant to which such financing is
obtained by the Company shall not, in the aggregate, be economically more
favorable to such Person than the terms and conditions offered to the Purchaser.
(f) If such financing is not obtained by the Company within the Sale
Period, any proposed incurrence of indebtedness (other than Senior Indebtedness)
shall again be subject to the notice requirements and rights of first refusal
set forth in this Section 5.2.
(g) For purposes of this Section 5.2 only, the term "the Company" shall be
deemed to include the Company and any of its subsidiaries. 5.3 Issuances of
Company Securities.
(a) As long as the Purchaser owns not less than the Threshold Percentage
and at least 25% of the Preferred Stock, the Company only shall have the right
to issue shares of Common Stock or preferred stock ranking junior to the
Preferred Stock with respect to liquidation preferences (the "Junior
Securities") as long as such issuance does not result in a limitation on the use
of the Company's net operating loss carryforwards under Section 382 of the Code.
Notwithstanding the foregoing, the issuance of Junior Securities will be
permissible even if it results in a limitation on the use of the Company's net
operating loss carryforwards; provided that at least two (2) of the Company's
directors do not vote in opposition to such issuance.
(b) Notwithstanding anything contained herein to the contrary, the Company
agrees that for as long as the Purchaser owns not less than the Threshold
Percentage and at least 25% of the Preferred Stock, without the prior written
consent of the Purchaser the Company will not:
(i) create or authorize the creation or increase the authorized amount of
or alter the rights of any additional or existing class or series of shares of
stock, unless the same ranks junior to the Preferred Stock as liquidation
preferences;
(ii) create or authorize any obligation or security convertible or
exercisable into or exchangeable for shares of Preferred Stock, regardless of
whether any such creation, authorization or increase shall be by means of
amendment to the Company's certificate of incorporation, or by merger,
consolidation or otherwise; or
(c) alter or amend the rights, preferences or privileges of the Preferred
Stock (whether by merger, consolidation, or otherwise).
30
(d) Notwithstanding anything contained in this Agreement to the contrary,
there shall be no limitation whatsoever at any time on the right of the Company
to issue Junior Securities.
5.4 Delisting.
In the event that the Company's Common Stock, for any reason, is not listed
on the Nasdaq SmallCap Market, the Over-the-Counter Bulletin Board or a similar
national exchange, (absent any time frame applicable to any transition from one
exchange to another) and the Company is no longer subject to the reporting
requirements of the Exchange Act, the Company hereby covenants and agrees with
the Purchaser that, so long as the Purchaser or any of its Affiliates owns the
Threshold Percentage, except as otherwise required in this Agreement, the
Company shall:
(a) Financial and Other Information Rights.
(i) As soon as practicable after the end of each fiscal year, and in any
event within ninety (90) days after each fiscal year beginning with the year
ending December 31, 2002, the Company shall furnish to the Purchaser an audited
consolidated (and consolidating) balance sheet of the Company and each of its
subsidiaries, as of the end of such fiscal year and an audited consolidated (and
consolidating) statements of operations, accumulated earnings and cash flows of
the Company and each of its subsidiaries, for such fiscal year, prepared in
accordance with generally accepted accounting principles, setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail and audited by a nationally recognized independent public
accounting firm selected by the Company and satisfactory to the Purchaser.
(ii) As soon as practicable after the end of each fiscal quarter, and in
any event within forty-five (45) days after each fiscal quarter beginning with
the quarter ending after the Company is subject to such delisting, the Company
shall furnish to the Purchaser an unaudited consolidated (and consolidating)
balance sheet of the Company and each of its subsidiaries, as of the end of such
fiscal quarter and unaudited consolidated (and consolidating) statements of
operations, accumulated earnings and cash flows of the Company and each of its
subsidiaries, for such fiscal quarter and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles and setting
forth in each case in comparative form the figures for the previous fiscal
quarter, subject to charges resulting from year-end adjustment, and accompanied
by a brief narrative description of the Company's business activities during
said fiscal quarter setting forth events which could reasonably be expected to
have a Material Adverse Effect, all in reasonable detail, and certified by the
chief financial officer and/or chief executive officer of the Company.
(iii) As soon as practicable after the end of each month, and in any event
within thirty (30) days thereafter, the Company shall furnish to the Purchaser a
31
consolidated balance sheet of the Company and each of its subsidiaries, as of
the end of such month, and consolidated statements of operations, accumulated
earnings and cash flow of the Company each of its subsidiaries, for such month
and for the current fiscal year to date, prepared in accordance with generally
accepted accounting principles, with such statements certified by the chief
financial officer of the Company as having been prepared in accordance with
generally accepted accounting principles.
(iv) No later than the end of each fiscal year, the Company shall furnish
to the Purchaser a business plan and budget for the Company and each of its
subsidiaries, for the next fiscal year. Such business plan and budget shall
contain information, data and other materials typically included in a business
plan and budget of a company similar in size and nature to the Company,
including budget data (including without limitation revenues, expenses and cash
position) for each month of such fiscal year, and which budget and business plan
shall be approved by a majority of the Board of Directors.
(v) From the date the Company becomes subject to the reporting requirements
of the Exchange Act, and in lieu of the financial information required pursuant
to this Agreement, but within the time periods required for the furnishing
thereof, the Company shall furnish to the Purchaser copies of its reports filed
on Form 10-K, Form 10-Q, Form 8-K or any successor form or forms.
(vi) Each set of financial statements delivered to the Purchasers pursuant
to this Section 5.4 will be accompanied by a certificate of the Chairman,
President or a Vice President and the Treasurer or an Assistant Treasurer of the
Company setting forth:
(1) Covenant Compliance - any information required in order to establish
whether the Company and any of its subsidiaries were in compliance
with the requirements of this Section 5.4 during the period covered by
the income statement then being furnished; and
Event of Default - that the signers have reviewed the relevant terms
of this Agreement and have made, or caused to be made, under their
supervision, a review of the transactions and conditions of the
Company and any of its subsidiaries from the beginning of the
accounting period covered by the income statements being delivered
therewith to the date of the certificate and that such review has not
disclosed the existence during such period of any condition or event
which constitutes a breach or default under the other Transaction
Documents or any of the other agreements contemplated hereby or
thereby or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action
the Company has taken or purposes to take with respect thereto.
32
(vii) The Company shall permit at least one representative of the Purchaser
to:
(1) visit and inspect any of the properties of the Company or any of its
subsidiaries and to discuss its and their affairs, finances and
accounts with the officers of the Company and its subsidiaries, all at
such reasonable times during regular business hours and as often as
may be reasonably requested; and
(2) discuss the affairs, finances and accounts of the Company with its
officers and consult with and advise the officers of the Company as to
the management of the Company at all reasonable times and as often as
reasonably requested;
provided that such Purchaser shall maintain and shall take appropriate steps to
ensure that any Purchaser representative maintains the confidentiality of any
proprietary information of the Company thereby obtained and, provided further,
that such Purchaser shall cause all its inspections to be conducted in a manner
that is not materially disruptive to the employees or operations of the Company.
(viii) Except as otherwise indicated, the Company shall provide notice to
such Purchaser of a Reportable Event (as hereinafter defined) within ten (10)
days (twenty (20) days in the case of clause (iii)) following the occurrence of
said event. The following events shall be "Reportable Events":
(1) receipt by the Company of a bona fide offer to buy a controlling
interest in the capital stock of the Company;
(2) the receipt by the Company of a notice that the Company is in default
under any loan agreement to which the Company is a party;
(3) the existence of any known default by the Company under its
certificate of incorporation (as the same may be amended from time to
time), including, without limitation, any certificate of designations
or this Agreement;
(4) as soon as available, information and data on any material adverse
changes in or any event or condition which has or could be reasonably
expected to have a Material Adverse Effect;
(5) immediately upon becoming aware of any condition or event which
constitutes a breach of any Transaction Document or any agreement
contemplated hereby or thereby, written notice specifying the nature
33
and period of existence thereof and what action the Company is taking
or proposes to take with respect thereto;
(6) as soon as reasonably possible and in any event within five (5) days
of becoming aware of any condition or event which reasonably could be
considered to materially affect the operating results or valuation of
the Company, written notice describing such condition or event;
(7) as soon as reasonably possible and in any event within five (5) days
of becoming aware that any employee of the Company (other than a
secretarial or clerical employee or employees earning less than
$100,000 per year) has been or will be terminated or has left or will
leave his or her employment, written notice thereof;
(8) as soon as reasonably possible and in any event within five (5) days
of becoming aware of any contact with or proposal from any investment
banker or any other Person expressing an interest in acquiring all, or
a part of, the Company, written notice thereof describing such contact
or proposal;
(9) as soon as reasonably possible and in any event within thirty (30)
days of becoming aware of any significant development with respect to
the Company's market, competition, price levels or technologies,
written notice describing such development;
(10) immediately upon becoming aware of any pending or threatened
litigation involving the Company, written notice thereof together with
a description of the Company's proposed response thereto; and
(11) with reasonable promptness, such other information and data with
respect to the Company and any Subsidiaries as any such party may from
time to time reasonably request.
(b) Additional Covenants. In addition, the Company shall, and shall cause
each of its subsidiaries, as applicable, to:
34
(i) Taxes. Promptly pay and discharge, or cause to be paid and discharged,
when due and payable, all lawful Taxes, assessments and governmental charges or
levies imposed upon the income, profits, property or business of the Company or
any subsidiary; provided, however, that any such Tax, assessment, charge or levy
need not be paid if the validity thereof shall currently be contested in good
faith and if the Company shall have set aside on its books adequate reserves
with respect thereto; and provided, further, that the Company shall pay all such
Taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any Lien that may have attached as security therefor.
(ii) Indebtedness. Promptly pay, or cause to be paid, when due, in
conformance with the Company's past practices, all material indebtedness
incident to the operations of the Company and its subsidiaries.
(iii) Maintenance of Property. Keep its properties and those of its
subsidiaries in good repair, working order and condition, reasonable wear and
tear excepted, and from time to time make all necessary and proper repairs,
renewals, replacements, additions and improvements thereto.
(iv) Leases. Comply, and cause its subsidiaries to comply, in all material
respects, at all times with the provisions of all leases to which any of the
Company and its subsidiaries is a party or under which any of them occupies real
property.
(v) Insurance. Keep its assets and those of its subsidiaries that are of an
insurable character insured by financially sound and reputable insurers against
loss or damage by fire, extended revenge and explosion in amounts customary for
companies in similar businesses similarly situated; and maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated. All such
policies of insurance shall be occurrence policies with "tail coverage"
so-called respecting all prior "claims made" policies, all in a form
satisfactory to the Purchaser. The Company shall give immediate written notice
to the Purchaser and to insurers of loss or damage to the property and shall
promptly file proof of loss with insurers.
(vi) Books and Records. Keep true records and books of account in which
full, true and correct entries will be made of all dealings or transactions in
relation to its business and affairs in accordance with generally accepted
accounting principles.
(vii) Compliance with Requirements of Governmental Authorities. Duly
observe and conform to, and cause its subsidiaries to so observe and conform to,
in all material respects, all applicable statutes, ordinances, rules,
regulations, orders and all valid requirements of governmental authorities
relating to the conduct of its businesses or to its property or assets. Without
limiting the generality of the foregoing, the Company will:
35
(1) comply with all minimum funding requirements applicable to any pension
plans, employee benefit plans or employee contribution plans which are
subject to ERISA or to the Code, and comply in all other respects with
the provisions of ERISA and the provisions of the Code applicable to
such plans; and
(2) comply with all applicable laws of the United States and of each
applicable jurisdiction relating to equal employment opportunity, any
rules, regulations, administrative orders and executive orders
relating thereto and the applicable terms, relating to equal
employment opportunity, of any contract, agreement or grant the
company has with, from or relating (by way of subcontract or
otherwise) to any other contract, agreement or grant of, any federal
or state governmental unit; and keep all records required to be kept,
and file all reports, affirmative action plans and forms required to
be filed, pursuant to any such applicable law or the terms of any such
government contract; and
(3) so conduct its business that neither the Company nor any Subsidiary
nor any property owned or occupied by the Company or any Subsidiary is
in violation of any Environmental Law of any sort or in violation of
any federal or state "OSHA" law so-called.
(viii) Organizational Documents. Duly observe and comply with the
certificate of incorporation, as the same may be amended from time to time, and
Bylaws of the Company as then in effect.
(ix) Transfer or Replacement of Stock. Use its best efforts to facilitate
the transfer or surrender of stock in the Company, and to replace certificates
of stock if lost or damaged.
(x) Maintenance of Corporate Existence.
(1) Maintain in full force and effect its corporate existence, rights and
franchises and use its commercially reasonable efforts to maintain in
full force and effect all licenses and other rights to use
Intellectual Property Rights owned or possessed by it or any
Subsidiary and necessary to the conduct of its business.
(2) Not transfer, assign or license any of its Intellectual Property
Rights now owned or hereafter acquired by it without approval of the
Company's Board of Directors without two (2) or more dissenting votes.
36
(xi) Proprietary Information.
(1) Cause each person now or hereafter employed by it who has access to
proprietary information concerning the Company or any of its
subsidiaries to enter into a customary business protection and or
confidentiality and non-disclosure agreement.
(2) Will use its commercially reasonable best efforts and judgment to
cause all technological developments, inventions, discoveries or
improvements made by employees of the Company and any subsidiaries to
be fully documented in accordance with the best prevailing
professional standards, and where possible and appropriate, cause all
employees to file and prosecute United States and foreign patent
applications relating to and protecting such developments.
(xii) Securities Law Filings. Make any filings necessary to perfect in a
timely fashion exemptions from (i) the registration and prospectus delivery
requirements of the Securities Act, and (ii) the registration or qualification
requirements of all applicable securities or blue sky laws of any state or other
jurisdiction, for the issuance of the Series A Preferred Stock to the Purchaser.
5.5 Additional Covenant.
(a) The Company's Board of Directors shall not take any action for the sole
purpose of negatively impacting the Preferred Stock and to positively impact the
Common Stock in the event that (i) the Purchaser owns at least 50.1% of the
Preferred Stock; (ii) the Purchaser shall have notified the Company of the
Purchaser's objections to such proposed action; (iii) Xxxxx Xxxxxx or such other
Preferred Designee voted against such action at a meeting of the Board of
Directors at which such action was proposed; and (iv) such action caused (A) a
material harm to the holders of the Series A Preferred Stock and (B) a material
benefit to the Common Stock. Cash dividends to holders of Common Stock shall not
be deemed action taken within the meaning of this Section 5.5.
(b) Notwithstanding paragraph 5.5(a) hereof, nothing contained therein
shall cause the Company's Board of Directors to engage in, or refrain from
engaging in any action, which may cause the Board of Directors to breach their
fiduciary obligations.
37
6. Registration of Restricted Stock.
---------------------------------
6.1 Demand Registration.
(a) On or after April 10, 2003, upon written notice of the Holders of a
majority of the then outstanding Registrable Securities (on a common stock
equivalent basis) requesting that the Company effect a registration under the
Securities Act of Registrable Securities and specifying the intended method or
methods of distribution thereof (which may include a continuous or delayed
offering), the Company shall prepare and file a Registration Statement on Form
S-3 under the Securities Act, or other appropriate Form in the event Form S-3 is
not available, covering the Registrable Securities then outstanding and shall
use commercially reasonable efforts to cause such Registration Statement to
become effective as expeditiously as possible and to remain effective until the
earlier to occur of (i) the date on which all Registrable Securities covered by
such Registration Statement have been sold and the distribution contemplated
thereby has been completed or (ii) the date by which all the Registrable
Securities covered thereby may be sold under Rule 144(k) (the "Effectiveness
Period"); provided, however, that the Purchaser shall not, pursuant to this
Section 6.1, be entitled to sell more than twenty-five percent (25%) of the
aggregate number of Registrable Securities acquired at the Closing in any
calendar quarter, or if the Company's fiscal year is not the calendar year, any
fiscal quarter of the Company. A demand registration requested pursuant to this
Section 6.1(a) will not be deemed to have been effected unless the Registration
Statement relating thereto has become effective under the Securities Act and
remains effective for the period described above.
(b) A Holder (including the Purchaser) or Holders requesting a registration
pursuant to this Section 6.1(a) may, at any time prior to the effective date of
the Registration Statement relating to such registration, revoke such request by
providing a written notice to the Company revoking such request.
(c) The Company and any Other Approved Holder may include its securities in
any demand registration effected pursuant to this Section 6.1; provided,
however, that if the managing underwriter(s) or the representative(s) of the
several underwriters (the "Managing Underwriter") of a proposed underwritten
public offering of Common Stock advises the Holder or Holders intending to
participate in such offering in writing that the total amount or kind of
securities which such Holders, the Company and such Other Approved Holders
intend to include in such offering is sufficiently large to materially adversely
affect the success of such offering, then the amount or kind of securities to be
offered for the accounts of the Other Approved Holders shall be reduced pro rata
among such Other Approved Holders to the extent necessary to reduce the total
amount or kind of securities to be included in such proposed public offering to
the amount or kind recommended by such Managing Underwriter and, if such
reduction results in no securities being offered for the accounts of the Other
Approved Holders in such proposed public offering, then the amount or kind of
38
securities to be offered for the account of the Company shall be reduced to the
extent necessary to reduce the total amount or kind of securities to be included
in such proposed public offering to the amount or kind recommended by such
managing underwriter or underwriters.
6.2 Piggyback Registration. If the Company at any time proposes to file a
registration statement with respect to any class of its equity securities,
whether for its own account (other than in connection with the Registration
Statement contemplated by Section 6.1 or a registration statement on Form S-4 or
S-8 (or any successor or substantially similar form), or the registration of (A)
an employee stock option, stock purchase or compensation plan or of securities
issued or issuable pursuant to any such plan or (B) a dividend reinvestment
plan) or for the account of an Other Approved Holder (a "Requesting
Securityholder"), then the Company shall in each case give written notice of
such proposed filing to all Holders of Registrable Securities at least twenty
(20) days prior to the anticipated filing date of any such registration
statement by the Company, and such notice shall offer to all Holders the
opportunity to have any or all of the Registrable Securities held by such
Holders included in such registration statement. Each Holder of Registrable
Securities desiring to have its Registrable Securities registered under this
Section 6.2 shall so advise the Company in writing within fifteen (15) days
after the date of receipt of such notice (which request shall set forth the
amount of Registrable Securities for which registration is requested), and the
Company shall include in such Registration Statement all such Registrable
Securities so requested to be included therein on the same terms and conditions
as the securities being registered by the Company. Any Holder's request for such
inclusion may be withdrawn, in whole or in part, at any time prior to the
effective date of such Registration Statement. Notwithstanding the foregoing, if
the Managing Underwriter of any such proposed public offering advises the
Company in writing that the total amount or kind of securities which the Holders
of Registrable Securities, the Company and the Other Approved Holders intend to
be included in such proposed public offering is sufficiently large to materially
adversely affect the success of such proposed public offering, then the amount
or kind of securities to be offered for the accounts of Holders of Registrable
Securities and the Other Approved Holders (other than the Requesting
Securityholder) shall be reduced pro rata to the extent necessary to reduce the
total amount or kind of securities to be included in such proposed public
offering to the amount or kind recommended by such Managing Underwriter before
the securities offered by the Company or any Requesting Securityholder are so
reduced.
6.3 Registration Procedures. In connection with the Company's registration
obligations pursuant to Sections 6.1 and 6.2 hereof, the Company will, as
expeditiously as practicable:
(a) prepare and file with the Commission a new Registration Statement or
such amendments and post-effective amendments to an existing Registration
Statement as may be necessary to keep such Registration Statement effective for
the time periods set forth in Section 6.1 (in connection with a demand
registration); provided, that as soon as practicable, but in no event later than
three (3) business days before filing such Registration Statement, any related
Prospectus or any amendment or supplement thereto, other than any amendment or
supplement made solely as a result of incorporation by reference of documents
39
filed with the Commission subsequent to the filing of such Registration
Statement, the Company shall furnish to the Holders of the Registrable
Securities covered by such Registration Statement and the Managing Underwriter,
if any, copies of all such documents proposed to be filed, which documents shall
be subject to the review of such Holders and underwriters;
(b) the Company shall not file any Registration Statement or amendment
thereto or any Prospectus or any supplement thereto (other than any amendment or
supplement made solely as a result of incorporation by reference of documents
filed with the Commission subsequent to the filing of such Registration
Statement) to which the Managing Underwriter of the applicable offering, if any,
or the Purchaser (if it is participating in such offering) or the Holders of a
majority of the Registrable Securities (on a Common Stock equivalent basis)
covered by such Registration Statement shall have reasonably objected in writing
within three (3) business days after receipt of such documents to the effect
that such Registration Statement or amendment thereto or Prospectus or
supplement thereto does not comply in all material respects with the
requirements of the Securities Act (provided that the foregoing shall not limit
the right of any Holder whose Registrable Securities are covered by a
Registration Statement to reasonably object, within two (2) business days after
receipt of such documents, to any particular information that is to be contained
in such Registration Statement, amendment, Prospectus or supplement that relates
specifically to such Holder, including any information describing the manner in
which such Holder acquired such Registrable Securities and the intended method
or methods of distribution of such Registrable Securities), and if the Company
is unable to file any such document due to the objections of such Managing
Underwriter, the Purchaser or such Holders, the Company shall use its best
efforts to cooperate with such Managing Underwriter, the Purchaser and Holders
to prepare, as soon as practicable, a document that is responsive in all
material respects to the reasonable objections of such underwriters, the
Purchaser and Holders;
(c) cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424; and comply
with the provisions of the Securities Act applicable to the Company with respect
to the disposition of all securities covered by such Registration Statement
during the applicable period in accordance with the intended method or methods
of distribution by the sellers thereof set forth in such Registration Statement,
Prospectus or supplement to the Prospectus;
(d) notify the selling Holders of Registrable Securities and the Managing
Underwriter, if any, promptly (providing confirmation in writing):
40
(1) when a new Registration Statement, Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with
respect to any new Registration Statement or post-effective amendment,
when it has become effective;
(2) of any request by the Commission for amendments or supplements to any
Registration Statement or Prospectus or for additional information;
(3) of the issuance by the Commission of any written comments with respect
to any filing;
(4) of any stop order suspending the effectiveness of any Registration
Statement or the initiation of any proceedings for that purpose and
the Company agrees that it will make every reasonable effort to obtain
as soon as possible the withdrawal of any such order or other action
suspending the effectiveness of any Registration Statement or
suspending the qualification or registration (or exemption therefrom)
of the Registrable Securities for sale in any jurisdiction;
(5) in the case of an underwritten offering, if at any time the
representations and warranties of the Company contemplated by
paragraph (n) below cease to be true and correct as of any time they
are required to be true and correct;
(6) of any suspension of the qualification or registration (or exemption
therefrom) of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose;
and
(7) of the happening of any event which makes any statement of a material
fact made in any Registration Statement, Prospectus or any document
incorporated therein by reference untrue or which requires the making
of any changes in any Registration Statement, Prospectus or any
document incorporated therein by reference so that it will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(e) if reasonably requested by the Managing Underwriter or a Holder of
Registrable Securities being sold in connection with an underwritten
offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the Managing Underwriter,
the Purchaser (if it is participating in such offering) and the
Holders of a majority of the Registrable Securities (on a Common Stock
equivalent basis) being sold in such underwritten offering reasonably
agree should be included therein relating to the sale of the
Registrable Securities, including information with respect to the
41
aggregate number of shares of Registrable Securities being sold to the
underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the underwritten
offering of the Registrable Securities to be sold in such offering;
and promptly make all required filings of such Prospectus supplement
or post-effective amendment;
(f) promptly after the filing of any document that is to be incorporated by
reference into a Registration Statement or Prospectus relating to Registrable
Securities covered by a Registration Statement filed pursuant to this Section 6,
provide copies of such document to the selling Holders of the Registrable
Securities covered thereby and the underwriters, if any;
(g) promptly after the filing of such documents with the Commission,
furnish to each selling Holder of Registrable Securities and each Managing
Underwriter, if any, without charge, at least one manually signed or "edgarized"
copy (but not to exceed five (5) manually signed copies of any document to all
selling Holders and the Managing Underwriter in the aggregate), and as many
conformed copies as may reasonably be requested, of the then effective
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those previously furnished or incorporated
by reference);
(h) deliver to each selling Holder of Registrable Securities and the
Managing Underwriter, if any, without charge, as many copies of the then
effective Prospectus (including each prospectus subject to completion) and any
amendments or supplements thereto as such Persons may reasonably request;
(i) register or qualify (or obtain exemption therefrom) or cooperate with
the selling Holders of Registrable Securities, the Managing Underwriter, if any,
and their respective counsel in connection with the registration or
qualification (or exemption therefrom) of such Registrable Securities for the
offer and sale under the securities or blue sky laws of such jurisdictions as
any selling Holder of Registrable Securities or Managing Underwriter, if any,
reasonably requests in writing;
(j) use its best efforts to keep each such registration or qualification
(or exemption therefrom) effective during the Effectiveness Period; and do any
and all other acts or things reasonably necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by the
then effective Registration Statement; provided, however, that the Company will
not be required to qualify to do business in any jurisdiction where it would not
otherwise be required to qualify, but for this paragraph (j);
42
(k) cooperate with the selling Holders of Registrable Securities and the
Managing Underwriter, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not bearing
any restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the Managing Underwriter may
request at least two (2) business days prior to any sale of Registrable
Securities to the underwriters;
(l) upon the occurrence of any event contemplated by clause (7) of
paragraph (d) above, promptly prepare a supplement or post-effective amendment
to the Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they are made,
not misleading; if any event described in clause (2) of paragraph (d) above
occurs, use its best efforts to cooperate with the Commission to prepare, as
soon as practicable, any amendment or supplement to such Registration Statement
or such related Prospectus and any other additional information, or to take
other action that may have been requested by the Commission;
(m) cause all Registrable Securities covered by the Registration Statement
to be listed on each securities exchange (or quotation system operated by a
national securities association) on which identical securities issued by the
Company are then listed (or included) if requested by the Purchaser (if it is
participating in such offering) or the Holders of a majority of the Registrable
Securities (on a Common Stock equivalent basis) covered by such Registration
Statement or the Managing Underwriter, if any, and enter into customary
agreements including, if necessary, a listing application and indemnification
agreement in customary form, and provide a transfer agent for such Registrable
Securities no later than the effective date of such Registration Statement;
(n) enter into customary agreements (including in the case of an
underwritten offering, an underwriting agreement with the Managing Underwriter
in form customary with respect to issuers of similar market capitalization and
reporting and financial histories) and take all such other actions in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities included in such Registration Statement, in each case, in connection
with an underwritten offering, as the Managing Underwriter determines is
reasonable and customary, and in connection therewith:
(1) make such representations and warranties to the Holders of such
Registrable Securities and each of the underwriters in such form,
substance and scope as are customarily made by issuers to underwriters
in secondary underwritten offerings of securities listed on the NASDAQ
SmallCap Market or any other system of automated dissemination of
quotation of securities prices;
43
(2) obtain opinions of counsel to the Company addressed to each selling
Holder of such Registrable Securities and to each of the underwriters
and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the underwriters and
the selling Holders of such Registrable Securities and shall cover the
matters customarily covered in opinions requested in secondary
underwritten offerings of securities listed on the NASDAQ SmallCap
Market or any other system of automated dissemination of quotation of
securities prices and such other matters as may be reasonably
requested by such Holders and underwriters);
(3) obtain "cold comfort" letters and updates thereof from the independent
certified public accountants of the Company addressed to each selling
Holder of such Registrable Securities and each of the underwriters,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings of securities listed on the NASDAQ
SmallCap Market or any other system of automated dissemination of
quotation of securities prices;
(4) the underwriting agreement shall contain indemnification and
contribution provisions and procedures no less favorable than those
set forth in Section 6.6 (and, to the extent applicable, Section 7.1)
hereof with respect to all parties to be indemnified pursuant to
Section 6.6 (and, to the extent applicable, Section 7.1); and
(5) the Company shall deliver such documents and certificates as may be
reasonably requested by the selling Holders of such Registrable
Securities and the Managing Underwriter to evidence compliance with
clause (1) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company
in respect of the relevant offering;
(o) provide a CUSIP number (if necessary) for the Registrable Securities no
later than the effective date of such registration statement;
(p) in the case of any non-underwritten offering:
(1) obtain opinions of counsel to the Company at the time of effectiveness
of such Registration Statement covering such offering and updates
thereof of customary frequency, addressed to each Holder of any
44
Registrable Securities participating in such offering and covering
matters that are no more extensive in scope than would be customarily
covered in opinions obtained in secondary underwritten offerings by
issuers with similar market capitalization and reporting and financial
histories;
(2) obtain "cold comfort" letters from the independent certified public
accountants of the Company at the time of effectiveness of such
Registration Statement and, upon the request of the Purchaser (if it
is participating in such offering) or the Holders of a majority of the
Registrable Securities (on a Common Stock equivalent basis) covered by
such Registration Statement, updates thereof of customary frequency,
in each case addressed to each Holder of Registrable Securities
participating in such offering and covering matters that are no more
extensive in scope than would be customarily covered in "cold comfort"
letters and updates obtained in secondary underwritten offerings by
issuers with similar market capitalization and reporting and financial
histories; and
(3) deliver a certificate of an executive officer of the Company at the
time of effectiveness of such Registration Statement and, upon the
request of the Purchaser (if it is participating in such offering) or
the Holders of a majority of the Registrable Securities (on a Common
Stock equivalent basis) covered by such Registration Statement,
updates thereof of customary frequency, such certificates to cover
matters no more extensive in scope than those matters customarily
covered in officer's certificates delivered in connection with
underwritten offerings by issuers with similar market capitalization
and reporting and financial histories;
(q) otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission relating to such registration and the distribution
of the securities being offered and make generally available to its securities
holders earnings statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than 60 days after the end of any 12-month period (or
120 days, if such period is a fiscal year) commencing at the end of any fiscal
quarter in which the Registrable Securities are sold to underwriters in a firm
commitment or best efforts underwritten offering, or, if not sold to
underwriters in such an offering, beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of such
Registration Statement, which earnings statements shall cover such 12- month
periods;
(r) cooperate and assist in any filings required to be made with the
National Association of Securities Dealers, Inc. and in the performance of any
customary due diligence investigation;
45
(s) make available, upon reasonable notice and during normal business
hours, for inspection by the Holders of the Registrable Securities covered by
such Registration Statement, any underwriter participating in any disposition
pursuant to such registration, and any attorney, accountant or other
representative retained by such sellers or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company and cause
the Company's officers, directors and employees to supply all information
reasonably requested by, and to cooperate fully with, any such representative,
underwriter, attorney or accountant in connection with such registration;
(t) cause the Registrable Securities covered by the Registration Statement
to be registered with or approved by such other governmental agencies or
authorities as may be reasonably necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of such
Registrable Securities; provided, however, that the Company shall not be
required to qualify to do business in any jurisdiction where it would not
otherwise be required to qualify, but for this paragraph (t); and
(u) use its best efforts to take all action necessary or advisable to
effect such registration in the manner contemplated by this Agreement.
6.4 Material Development Election.
(a) Subject to Section 6.4(b) below, the Company shall be entitled, for a
period of time not to exceed thirty consecutive (30) days (a "Suspension
Period"), to postpone the filing of any Registration Statement otherwise
required to be filed by it pursuant to Section 6.1 and/or request that the
Holders refrain from effecting any public sales or distributions of their
Registrable Securities if the Company's Board of Directors shall have reasonably
determined in good faith and in its reasonable business judgment that such
registration would interfere in any material respect with any financing (other
than an underwritten secondary offering of any securities of the Company),
acquisition, corporate reorganization or other transaction or development
involving the Company or any subsidiary of the Company that in the reasonable
good faith business judgment of such board is a transaction or development that
is or would be material to the Company (a "Material Development Election").
(b) The Board of Directors shall, as promptly as practicable, give the
Holders written notice of any such Material Development Election. In the event
of a determination by the Board of Directors to postpone the filing of a
Registration Statement required to be filed pursuant to Section 6.1 hereof, the
Company shall be required to file such Registration Statement as soon as
practicable after the Board of Directors of the Company shall determine, in its
reasonable business judgment, that the filing of such Registration Statement and
the offering thereunder will not interfere with the aforesaid material
transaction or development, but in any event no later than the end of such
Suspension Period. In addition, if the Board of Directors of the Company has
requested that the Holders refrain from making public sales or distributions of
46
their Registrable Securities, such board shall, as promptly as practicable
following its determination that the Holders may recommence such public sales
and distributions, notify such Holders in writing of such determination (but in
any event no later than the end of such Suspension Period). In the event the
Company shall exercise a Material Development Election during a period when a
Registration Statement filed pursuant to Section 6.1 hereof is effective, the
time period specified in Section 6.1 hereof during which such Registration
Statement is required to be kept effective shall be extended by the number of
days during which the Holders are prohibited by the Company from publicly
selling or distributing their securities.
(c) The Purchaser agrees that, upon receipt of any notice from the Company
of a Suspension Period, the Purchaser shall forthwith discontinue disposition of
shares of Common Stock covered by such Registration Statement or Prospectus
until the Purchaser (i) is notified in writing by the Company that the use of
the applicable prospectus may be resumed, (ii) has received copies of a
supplemental or amended prospectus, if applicable, and (iii) has received copies
of any additional or supplemental filings which are incorporated or deemed to be
incorporated by reference into such prospectus. (c) Notwithstanding the
foregoing, no more than one Suspension Period may occur during any twelve-month
period, unless approved by a majority-in-interest of the then outstanding
Holders of Registrable Securities (on a common equivalent basis). The Company
shall use its best efforts to limit the duration and aggregate number of any
Suspension Periods.
6.5 Registration Expenses. All expenses incident to the Company's
performance of or compliance with Section 6 of this Agreement, including all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications or registrations (or the obtaining of
exemptions therefrom) of the Registrable Securities), printing expenses
(including expenses of printing Prospectuses), messenger and delivery expenses,
internal expenses (including all salaries and expenses of its officers and
employees performing legal or accounting duties), fees and disbursements of its
counsel and its independent certified public accountants (including the expenses
of any special audit or "comfort" letters required by or incident to such
performance or compliance), securities acts liability insurance (if the Company
elects to obtain such insurance), fees and expenses of any special experts
retained by the Company in connection with any registration hereunder, fees and
expenses of other Persons retained by the Company, (all such expenses being
referred to as "Registration Expenses"), shall be borne by the Company, whether
or not any registration statement becomes effective; provided that Registration
Expenses shall not include any underwriting discounts, commissions or fees
attributable to the sale of the Registrable Securities.
6.6 Registration Rights Indemnification.
(a) Indemnification by the Company.
47
(i) The Company will indemnify and hold harmless, to the fullest extent
permitted by law, but without duplication, each Holder of Registrable Securities
and each of their respective Affiliates, including any managed or advised
accounts and any investment advisor or agent therefor, officers, directors,
employees, partners, representatives and agents, and each Person who controls
such Holder or such other Persons (within the meaning of the Securities Act)
(for purposes of this Section 6.6(a), a "Holder Indemnified Person"), from and
against, and will reimburse such Holder Indemnified Person with respect to, any
and all claims, actions, demands, losses, damages, liabilities, costs and
expenses (including reasonable costs of investigation and reasonable legal fees
and expenses) ("Indemnifiable Costs and Expenses") to which such Holder
Indemnified Person may become subject under the Securities Act or otherwise and
arise out of or are based upon (i) violation of securities laws or (ii) any
untrue statement or alleged untrue statement of any material fact contained in,
or any omission or alleged omission to state therein a material fact required to
be stated in, any such Registration Statement, any Prospectus contained therein
or any amendment or supplement thereto or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the Company will not be liable in any such
case to the extent that any costs or expense covered by the preceding clauses
(i) or (ii) arises out of or results from any untrue or alleged untrue statement
of any material fact contained in such Registration Statement, any Prospectus
contained therein or any amendment or supplement thereto or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was so made solely in reliance upon and in substantial
conformity with written information furnished by such Holder Indemnified Person
specifically for use in the preparation of any such Registration Statement,
Prospectus or amendment or supplement thereto.
(ii) The Company further agrees promptly upon demand by each Holder
Indemnified Person to reimburse each Holder Indemnified Person for any Holder
Indemnifiable Costs and Expenses as they are incurred by it; provided that if
the Company reimburses a Holder Indemnified Person hereunder for any expenses
incurred in connection with a lawsuit, claim, inquiry or other proceeding or
investigation for which indemnification is sought, such Holder Indemnified
Person agrees to refund such reimbursement of Holder Indemnifiable Costs and
Expenses to the extent it is finally judicially determined that the indemnity
provided for in this Section 6.6(a) is not applicable to, or the Company is not
otherwise obligated to pay, such Holder Indemnified Person in accordance with
the terms hereof or otherwise. The indemnity, contribution and expense
reimbursement obligation of the Company under this Section 6.6(a) shall be in
addition to any liability it may otherwise have.
(iii) The obligations of the Company hereunder shall survive the Closing
and the termination of any Registration Statement under which any Registrable
Securities were registered the termination of this Agreement and shall not be
extinguished with respect to any Person because any other Person is not entitled
to indemnity or contribution hereunder.
48
(b) Indemnification by Holders of Registrable Securities. Each Holder of
Registrable Securities which is included in a Registration Statement pursuant to
the provisions of this Section 6 will indemnify and hold harmless the Company,
each of its subsidiaries and Affiliates, the Company, any of its subsidiaries or
Affiliates and their respective officers, directors, employees, partners,
stockholders, agents, representatives, any Person who controls (within the
meaning of the Securities Act) (each, a "Company Indemnified Person"), from and
against, and will reimburse such Company Indemnified Person with respect to, any
and all Indemnifiable Costs and Expenses to which the Company or such Company
Indemnified Person may become subject under the Securities Act or otherwise and
which arise out of or result from any untrue or alleged untrue statement of any
material fact contained in such Registration Statement, any Prospectus contained
therein or any amendment or supplement thereto, or any omission or the alleged
omission to state therein any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, in each case to the extent, but only to the
extent, that such untrue statement or omission or alleged untrue statement or
alleged omission was so made solely in reliance upon and in substantial
conformity with written information furnished by such Holder of Registrable
Securities specifically for use in the preparation thereof; provided, however,
that the liability of any Holder of Registrable Securities pursuant to this
subsection (b) shall be limited to an amount not to exceed the net proceeds
received by such Holder of Registrable Securities pursuant to the Registration
Statement which gives rise to such obligation to indemnify.
(c) Conduct of Indemnification Proceedings; Contribution.
(i) Each indemnifying party and indemnified party under this Section 6.6
shall comply with the procedures set forth in Section 7.1(c) with respect to any
indemnity sought pursuant to this Section 6.6.
(ii) Each indemnifying party and indemnified party under this Section 6.6
also agrees to comply with the provisions in Section 7.1(d) as they relate to
contribution.
49
6.7 Reporting Requirements Under the Exchange Act. The Company shall use
its best efforts to make publicly available and available to the Holders,
pursuant to Rule 144, such information as is necessary to enable the Holders to
make sales of Registrable Securities pursuant to that Rule. The Company shall
use its best efforts to file timely with the Commission all documents and
reports required of the Company under the Exchange Act. The Company shall
furnish to any Holder, upon request, a written statement executed on behalf of
the Company as to compliance with the current public information requirements of
Rule 144. In addition, the Company will provide to any Holder of a Registrable
Security, or any potential purchaser of a Registrable Security, upon any such
Person's reasonable request, the information required by paragraph (d)(4) of
Rule 144A.
6.8 Stockholder Information. The Company may require each seller of
Registrable Securities as to which any registration is being effected to furnish
to the Company such information regarding such seller and the distribution of
such securities as the Company or the Managing Underwriter may from time to time
reasonably request in writing.
6.9 Participation in Underwritten Registrations.
(a) If any of the Registrable Securities covered by a Registration
Statement required to be filed pursuant to Section 6.1 hereunder are to be sold
in an underwritten offering, the Company shall select the Managing Underwriter
that will administer the offering, provided the Purchaser (if it is
participating in such offering) or, if such Purchaser is not so participating in
such offering, the Holders of a majority of the Registrable Securities (on a
Common Stock equivalent basis) included in such offering shall have the right to
consent to such selection, provided further that such consent may not be
unreasonably withheld. .
(b) No Person may participate in any underwritten offering hereunder unless
such Person (i) agrees to sell such Person's Registrable Securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the underwriting or other agreement between the
Company and the Managing Underwriter. Nothing in this Section 6.9 shall be
construed to create any additional rights regarding the registration of
Registrable Securities in any Person otherwise than as set forth herein.
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7. Miscellaneous.
7.1 Indemnification. In addition to any indemnification provided elsewhere
in this Agreement, the parties hereto agree as follows:
(a) Company Indemnification.
(i) The Company will indemnify and hold harmless, to the fullest extent
permitted by law, but without duplication, the Purchaser and each of its
Affiliates including any managed or advised accounts and any investment advisor
or agent therefor, and their respective, officers, directors, employees,
partners, representatives, agents, and each Person who controls the Company and
each of its Affiliates within the meaning of the Securities Act) (each of the
foregoing Persons being a "Purchaser Indemnified Person"), from and against any
and all Indemnifiable Costs and Expenses to which such Purchaser Indemnified
Person may become subject under the Securities Act or otherwise arising out of
or based in any manner upon any breach by the Company of any its
representations, warranties or covenants contained in the Transaction Documents
or in any agreement, instrument or document delivered by the Company hereunder
or thereunder.
(ii) The Company further agrees promptly upon demand by each Purchaser
Indemnified Person to reimburse each Purchaser Indemnified Person for any
Purchaser Indemnifiable Costs and Expenses as they are incurred by it; provided
that if the Company reimburses a Purchaser Indemnified Person hereunder for any
Indemnifiable Costs and Expenses incurred in connection with a lawsuit, claim,
inquiry or other proceeding or investigation for which indemnification is
sought, such Purchaser Indemnified Person agrees to refund such reimbursement of
Indemnifiable Costs and Expenses to the extent it is finally judicially
determined that the indemnity provided for in this Section 7.1(a) is not
applicable to such Purchaser Indemnified Person in accordance with the terms
hereof or otherwise or the Company is not otherwise obligated to indemnify such
Purchaser Indemnified Person. The indemnity, contribution and expense
reimbursement obligation of the Company under this Section 7.1 shall be in
addition to any liability it may otherwise have.
(iii) The obligations of the Company hereunder shall survive the Closing
and any repurchase, conversion, exchange or transfer of the Preferred Stock and
the termination of this Agreement and shall not be extinguished with respect to
any Person because any other Person is not entitled to indemnity or contribution
hereunder.
(b) Purchaser Indemnification. The Purchaser agrees and covenants to agree
and covenant to and to hold harmless and indemnify each Company Indemnified
Person, from and against any and all Indemnifiable Costs and Expenses to which
such Company Indemnified Person may become subject under the Securities Act or
otherwise which arises out of or is based in any manner upon any breach by the
Purchaser of any its representations, warranties or covenants contained in the
Transaction Document or in any agreement, instrument or document delivered by
the Purchaser hereunder or thereunder.
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(c) Conduct of Indemnification Proceedings. Promptly after receipt by a
party indemnified pursuant to the provisions of paragraph (a) or (b) of this
Section 7.1 or paragraph (a) or (b) of Section 6.6 of notice of the commencement
of any action involving the subject matter of the foregoing indemnity
provisions, such indemnified party will, if a claim thereof is to be made
against the indemnifying party pursuant to the provisions of paragraph (a) or
(b) of this Section 7.1 or paragraph (a) or (b) of Section 6.6, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to an indemnified party otherwise than under paragraph (a) or (b) of this
Section 7.1 or paragraph (a) or (b) of Section 6.6, and shall not relieve the
indemnifying party from liability under this Section 7.1 or Section 6.6 unless
such indemnifying party is materially prejudiced by such omission. In case such
action is brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party shall have the right
to participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of such paragraph (a) or (b) of
this Section 7.1 or paragraph (a) or (b) of Section 6.6 for any legal or other
expense subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall be liable to an indemnified party for any settlement of any action
or claim without the consent of the indemnifying party. No indemnifying party
will consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation and no settlement can have non-monetary remedies.
(d) Contribution. If the indemnification provided for in subsection (a) or
(b) of this Section 7.1 or in subsection (a) or (b) of Section 6.6 is held by a
court of competent jurisdiction to be unavailable to a party to be indemnified
with respect to any Indemnifiable Costs and Expenses, then each indemnifying
party under any such subsection, in lieu of indemnifying such indemnified party
thereunder, hereby agrees to contribute to the amount paid or payable by such
indemnified party as a result of Indemnifiable Costs and Expenses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions, acts, facts matters or circumstances which
resulted in such Indemnifiable Costs and Expenses, as well as any other relevant
equitable considerations. To the extent applicable to Section 6.6 hereof, the
52
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution hereunder from
any Person who was not guilty of such fraudulent misrepresentation.
7.2 Entire Agreement; Survival of Provisions. The Transaction Documents and
the SEC Filings referenced herein and therein constitute the entire agreement of
the parties with respect to the transactions contemplated hereby and supersede
all prior agreements and understandings with respect thereto, whether written or
oral. All of the covenants of the parties made herein shall remain operative and
in full force and effect pursuant to their respective terms regardless of
acceptance of the Preferred Stock and payment therefor. The representations and
warranties set forth herein shall survive the execution and delivery of this
Agreement until the second anniversary of the date of Closing (the "Expiration
Date") and shall survive the issuance of the Preferred Stock and the issuance of
the Common Stock upon conversion of the Preferred Stock, and shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Purchaser or the Company. Notwithstanding the preceding sentence, any
representation or warranty in respect of which an indemnity may be sought hereof
shall survive the time at which it would otherwise terminate pursuant to the
preceding sentence, if a claim for indemnification shall have been given to the
party against whom such indemnity may be sought prior to the Expiration Date.
The representations, warranties, agreements and covenants made in the
Transaction Documents shall be deemed to have been relied upon by the parties
hereto.
7.3 No Waiver; Modifications in Writing. No failure or delay by a party in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. Except as otherwise expressly provided herein with
respect to any right of indemnification, the remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to any
party at law or in equity or otherwise. No waiver of or consent to any departure
by a party from any provision of this Agreement shall be effective unless signed
in writing by the parties entitled to the benefit thereof. No amendment,
modification or termination of any provision of this Agreement shall be
effective unless signed in writing by all parties. Any amendment, supplement or
modification of or to any provision of this Agreement, any waiver of any
provision of this Agreement, and any consent to any departure from the terms of
any provision of this Agreement, shall be effective only in the specific
instance and for the specific purpose for which made or given.
7.4 Notices. All notices, demands and other communications provided for
hereunder shall be in writing, shall be given by registered or certified mail,
return receipt requested, on the date sent by telecopy with electronic
confirmation of such transmission, the business day next following deposit with
53
a courier service for overnight delivery with written confirmation of such
delivery or upon personal delivery, addressed to the parties, as follows:
If to the Company, to:
Direct Insite Corp.
00 Xxxxxxx Xxxxx
Xxxxxxx, Xxx Xxxx 00000
Attention: Chief Financial Officer
Telecopy: (000) 000-0000
with a copy to:
Xxxxx X. Xxxxxxxxx, Esq.
Blau, Kramer, Wactlar & Xxxxxxxxx, P.C.
000 Xxxxxxx Xxxxxxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Telecopy: (000) 000-0000
If to the Purchaser, to:
Metropolitan Venture Partners II, L.P.
000 Xxxx Xxxxxx Xxxxx, 00xx Xxxxx
Xxx Xxxx, XX 00000
Telecopy: (000) 000-0000
Attention: Xxxxx X. Xxxxxx, Managing Partner
with copies to:
Kramer, Levin, Naftalis & Xxxxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx X. Xxxxxxxxx, Esq.
Telecopy: (000) 000-0000
or to such other address as any party shall designate in writing in compliance
with the provisions of this Section 7.4.
7.5 Execution in Counterparts. This Agreement may be executed in any number
of counterparts and by different parties hereto on separate counterparts, each
of which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but one
and the same Agreement.
54
7.6 Binding Effect; Assignment. The rights and obligations of the parties
under this Agreement may not be assigned or otherwise transferred to any other
Person, without the prior written consent of the other party hereto; provided
that the Purchaser may assign or otherwise transfer the shares of Common Stock
issuable upon conversion of the Preferred Stock and any or all of such rights
(except the Preferred Stock) and/or obligations hereunder to any of its
Affiliates without obtaining any such consent, ,but only if such Affiliate: (A)
agrees to be bound by the terms of this Agreement; (B) is, at the time of such
transfer, an Accredited Investor; (C) provides the Company such written
certification as the Company may reasonably require as to the transferee's
status as an Accredited Investor and agreement to be so bound as the Company may
reasonably request; and (D) such transfer to any such transferee does not
violate federal or state securities laws. Except as expressly provided in this
Agreement, this Agreement shall not be construed so as to confer any right or
benefit upon any Person other than the parties to this Agreement and their
respective successors and permitted assigns. This Agreement shall be binding
upon and shall inure to the benefit of the Company, the Purchaser and their
respective permitted successors and assigns.
7.7 Governing Law. This Agreement shall be deemed to be a contract made
under and shall be governed by and construed in accordance with the internal
laws of the State of New York without reference to the principles of conflict of
laws,] provided, however, that the due authorization, issuance and
enforceability of the terms of, and the designation, rights, preferences, rights
and privileges, of the Preferred Stock or the due authorization, issuance and of
the Common Stock, the conduct of, or any standard of conduct applicable to, the
Board of Directors of the Company, or any requirement of stockholder approval or
the validity or invalidity of any action by the Board of Directors or compliance
by the Company or any subsidiary with its certificate of incorporation or bylaws
or any of their corporate authority, shall be governed by, and construed in
accordance with, the laws of the State of Delaware without giving effect to the
principles thereof relating to the conflict of laws.
7.8 Consent to Jurisdiction and Service of Process. Any suit, action or
proceeding arising out of or relating to the Transaction Documents or the
transactions contemplated hereby or thereby may be instituted in any Federal
court situated in the State of New York or any state court of the State of New
York, in each case, in the Borough of Manhattan, City of New York, or Nassau or
Suffolk County in the State of New York, and each party agrees not to assert, by
way of motion, as a defense or otherwise, in any such suit, action or
proceeding, any claim that it is not subject personally to the jurisdiction of
such court, that the suit, action or proceeding is brought in an inconvenient
forum, that the venue of the suit, action or proceeding is improper or that the
Transaction Documents or the subject matter hereof or thereof may not be
enforced in or by such court. Each party further irrevocably submits to the
jurisdiction of such court in any such suit, action or proceeding. Any and all
service of process and any other notice in any such suit, action or proceeding
shall be effective against any party if given personally or by registered or
certified mail, return receipt requested if sent to such party at the address
for such party set forth in Section 7.4 hereof, or by any other means of mail
55
that requires a signed receipt, postage fully prepaid, mailed to such party as
herein provided. Nothing herein contained shall be deemed to affect the right of
any party to serve process in any manner permitted by law or to commence legal
proceedings or otherwise proceed against any other party in any other
jurisdiction.
7.9 Further Assurances. Each of the parties hereto shall execute and
deliver such documents, instruments and agreements and take such further actions
as may be reasonably required or desirable to carry out the provisions of the
Transaction Documents and the transactions contemplated hereby and thereby, and
each of the parties hereto shall cooperate with each other in connection with
the foregoing.
7.11 Severability of Provisions. Any provision hereof that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by law, the parties hereto waive any
provision of law that renders any such provision prohibited or unenforceable in
any respect.
7.12 Headings. The Article, Section and subsection headings used or
contained in this Agreement are for convenience of reference only and shall not
affect the construction of this Agreement.
7.13 Costs, Expenses and Taxes.
(a) The Company shall pay any and all stamp, transfer and other similar
Taxes payable or determined to be payable in connection with the execution and
delivery of this Agreement or the original issuance of the Preferred Stock and
shall save and hold the Purchaser harmless from and against any and all
liabilities with respect to or resulting from any delay in paying, or omission
to pay, such Taxes.
(b) Each party shall bear its own fees, costs and expenses in connection
with the execution, delivery and performance of the Transaction Documents,
except as set forth in this Agreement.
7.14 Waiver of Jury Trial. The parties hereto hereby irrevocably waive all
right to a trial by jury in any action, proceeding or counterclaim arising out
of or relating to this Agreement or the Stockholders Agreement or the
transactions contemplated hereby or thereby.
7.15 Publicity. The parties agree that no public release or announcement
concerning the Transaction Documents or the transactions contemplated hereby or
thereby shall be made without advance review and approval by each party hereto,
except as otherwise required by applicable law, and which review and approval
shall not be unreasonably withheld or delayed.
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SIGNATURE PAGE FOLLOWS
57
COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
DIRECT INSITE CORP.
By: /s/ Xxxxxx Xxxxxx
--------------------------
Name: Xxxxxx Xxxxxx
Title: Chief Executive Officer
58
COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
METROPOLITAN VENTURE PARTNERS II, L.P.
By: METROPOLITAN VENTURE PARTNERS
(Advisors), L.P., as general partner
By: METROPOLITAN VENTURE PARTNERS
CORP., as general partner
By: /s/ Xxxxxxx Xxxxx
------------------------------
Name: Xxxxxxx Xxxxx
Title: Managing Director
DISCLOSURE SCHEDULE
