EXHIBIT 10.5
COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT
SUBSCRIPTION AGREEMENT
(HIGH YIELD OFFERING)
DATED AS OF FEBRUARY 20, 1998
TABLE OF CONTENTS
PAGE
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SECTION 1 Authorization and Sale of Preferred Stock and Issuance of Warrants.............. 1
1.1 Authorization.................................................................. 1
1.2 Sale of Shares of Series C Preferred to Intel.................................. 1
1.3 Company Right to Sell to Warburg and Crosspoint................................ 2
1.4 Issuance of Warrants in Consideration of Commitment............................ 3
1.5 Amendment and Restatement of the Stockholder Rights Agreement.................. 3
SECTION 2 Closing Dates; Delivery......................................................... 3
2.1 Closing Dates.................................................................. 3
2.2 Delivery....................................................................... 4
SECTION 3 Representations and Warranties of the Company................................... 4
3.1 Organization of the Company.................................................... 4
3.2 Company Capital Structure...................................................... 5
3.3 Subsidiaries................................................................... 6
3.4 Authority...................................................................... 6
3.5 No Conflict.................................................................... 6
3.6 Consents....................................................................... 7
3.7 Company Financial Statements................................................... 7
3.8 No Undisclosed Liabilities..................................................... 7
3.9 No Changes..................................................................... 7
3.10 Tax Matters.................................................................... 9
3.11 Restrictions on Business Activities............................................10
3.12 Title of Properties; Absence of Liens and Encumbrances.........................10
3.13 Intellectual Property..........................................................10
3.14 Agreements, Contracts and Commitments..........................................11
3.15 Interested Party Transactions..................................................12
3.16 Governmental Authorization.....................................................13
3.17 Litigation.....................................................................13
3.18 Employees; Employee Compensation...............................................13
3.19 Minute Books...................................................................14
3.20 Environmental Matters..........................................................14
3.21 Brokers' and Finders' Fees; Third Party Expenses...............................15
3.22 Registration Rights............................................................15
3.23 No Interference or Conflict....................................................15
3.24 Insurance......................................................................15
3.25 Regulatory Matters.............................................................15
3.26 Complete Copies of Materials...................................................16
3.27 Representations Complete.......................................................16
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SECTION 4 Representations and Warranties of the Purchasers.......................... 17
4.1 Investment Representations and Covenants of the Purchasers............... 17
4.2 No Public Market......................................................... 18
4.3 Domicile................................................................. 18
4.4 Authority................................................................ 18
SECTION 5 Conditions to Closing of Purchasers....................................... 19
5.1 Conditions to Closing of Intel........................................... 19
5.2 Conditions to Closing of Warburg and Crosspoint.......................... 19
SECTION 6 Conditions to Closing of Company.......................................... 20
SECTION 7 Miscellaneous............................................................. 20
7.1 Governing Law............................................................ 20
7.2 Survival................................................................. 20
7.3 Successors and Assigns................................................... 21
7.4 Entire Agreement; Amendment.............................................. 21
7.5 Notices, etc............................................................. 21
7.6 Delays or Omissions...................................................... 21
7.7 California Corporate Securities Law...................................... 21
7.8 Expenses................................................................. 22
7.9 Counterparts............................................................. 22
7.10 Severability............................................................. 22
7.11 Gender................................................................... 22
7.12 Confidentiality.......................................................... 22
7.13 Enforceability; Specific Performance; Damages............................ 22
7.14 Jurisdiction and Venue................................................... 22
7.15 Termination.............................................................. 23
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TABLE OF CONTENTS
(CONTINUED)
PAGE
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EXHIBITS
A. Schedule of Purchasers
B. Amended and Restated Certificate of Incorporation
C. Form of Series C Warrant
D. Form of Common Warrant
E. Amended and Restated Stockholder Rights Agreement
F. Exceptions to Representations and Warranties
G. Form of Opinion of Xxxxxx Xxxxxxx Xxxxxxxx & Xxxxxx, P.C.
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COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
This Agreement is made as of February 20, 1998 among Covad Communications
Group, Inc., a Delaware corporation (the "COMPANY"), with its principal office
at 0000 Xxxxxxx Xxxxxx, Xxxxx Xxxxx, Xxxxxxxxxx 00000, and Warburg, Xxxxxx
Ventures, L.P. ("WARBURG"), Crosspoint Venture Partners 1996 ("CROSSPOINT") and
Intel Corporation ("INTEL") (individually, a "PURCHASER" and collectively, the
"PURCHASERS").
WHEREAS, the Company intends to make a private offering of units consisting
of senior notes due 2005 and warrants to purchase Common Stock with aggregate
gross proceeds of at least $100,000,000 (the "HIGH YIELD OFFERING"); and
WHEREAS, as a condition to the High Yield Offering the placement agents,
Bear, Xxxxxxx & Co. Inc. and BT Alex. Xxxxx Incorporated (collectively the
"INITIAL PURCHASERS") have required that the Company obtain from Warburg and
Crosspoint a binding commitment for an investment in Series C Preferred Stock of
the Company in the aggregate amount of $16,000,000 to be made within one year
after the closing of the High Yield Offering; and
WHEREAS, the Company desires to sell, and Intel desires to purchase, an
aggregate of $1 million of shares of Series C Preferred Stock concurrently with
the closing of the High Yield Offering; and
WHEREAS, the Company and the Purchasers wish to set forth the terms and
conditions upon which the Company will sell, and the Purchasers will purchase,
shares of Series C Preferred Stock.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1
Authorization and Sale of Preferred Stock and Issuance of Warrants
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1.1 Authorization. The Company has authorized the sale and issuance of
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3,716,429 shares of its Series C Preferred Stock ("SERIES C PREFERRED"),
including 1,675,000 shares issuable upon exercise of the Series C Warrants (as
defined in Section 1.3 below), having the rights, restrictions, privileges and
preferences as set forth in the Company's Amended and Restated Certificate of
Incorporation attached to this Agreement as Exhibit B (the "AMENDED CERTIFICATE
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OF INCORPORATION").
1.2 Sale of Shares of Series C Preferred to Intel. Subject to the terms
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and conditions hereof, the Company will issue and sell to Intel, and Intel will
buy from the Company, the number of shares (the
"SHARES") of Series C Preferred and Series C Warrants (as defined below)
specified opposite Intel's name on the Schedule of Purchasers attached hereto as
Exhibit A, for the aggregate purchase price specified opposite its name on the
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Schedule of Purchasers; provided, that the purchase and sale of such Series C
Warrants to Intel shall be conditioned upon, and the delivery of such Series C
Warrants to Intel shall be made concurrently with, the Second Closing (as
defined below). It is understood that no additional consideration shall be due
with respect to the delivery of the Series C Warrants to Intel at such Second
Closing. The Company's agreement with Intel is separate from its agreements with
the other Purchasers hereunder, and the sale of the Series C Preferred and the
Series C Warrants to Intel is separate from the Company's sale of Series C
Preferred and Series C Warrants to the other Purchasers hereunder.
1.3 Company Right to Sell to Warburg and Crosspoint.
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(a) Subject to the terms and conditions hereof, the Company shall have
the unequivocal right to sell to Warburg and Crosspoint, and Warburg and
Crosspoint shall have the unequivocal obligation to purchase, severally and not
jointly, the number of Shares and the number of warrants to purchase Series C
Preferred (the "SERIES C WARRANTS") specified opposite their respective names on
the Schedule of Purchasers, for the aggregate purchase price specified opposite
their respective names on the Schedule of Purchasers, at any time from and after
the closing of the High Yield Offering to that date which is one year from the
date of the closing of the High Yield Offering (the "FINAL CLOSING DATE"). The
Company may exercise its right at any time by delivering a written notice to
each of Warburg and Crosspoint stating that the Company has exercised its right
to sell the Shares and the Series C Warrants to Warburg and Crosspoint and
setting forth the closing date as provided in Section 2.1 (the "EXERCISE
NOTICE"). The Company's determination to exercise the foregoing right shall be
made in the sole discretion of the independent members of the Board of Directors
of the Company (excluding the directors affiliated with Warburg and Crosspoint)
(the "INDEPENDENT DIRECTORS"). In the event that the Company has not delivered
the Exercise Notice or completed a Replacement Financing (as defined in Section
1.3(b) below) before the Final Closing Date, then the Company shall sell, and
Warburg and Crosspoint shall purchase, the Shares and the Series C Warrants on
the Final Closing Date. The aggregate number of Series C Warrants shall be
1,675,000. The Series C Warrants shall be in the form of Exhibit C.
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(b) The Company may in its discretion elect not to exercise its right
to sell Series C Preferred and Series C Warrants to Warburg and Crosspoint and
may complete an alternative equity financing in the aggregate amount of $16
million or greater of Common Stock or Preferred Stock in lieu thereof (the
"REPLACEMENT FINANCING"); provided that (i) if the terms of such Replacement
Financing are at the same or a higher price per share (i.e., valuation) and are
pari passu or more favorable to the Company than the terms of the Series C
Preferred set forth in the Amended Certificate of Incorporation, the
determination as to whether to complete such Replacement Financing shall be in
the sole discretion of the Independent Directors; and (ii) if the terms of such
Replacement Financing are at a lower price per share (i.e., valuation) and are
less favorable to the Company than such Series C Preferred, the determination as
to whether to complete such Replacement Financing shall be made by the unanimous
approval of the whole Board of Directors. Each of Warburg and Crosspoint agrees
that if the Company elects an alternative equity financing pursuant to the
foregoing sentence, it will vote its shares of
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Series B Preferred Stock as necessary to enable the Company to complete such
financing, provided such action shall not amend the terms of the Series B
Preferred Stock.
1.4 Issuance of Warrants in Consideration of Commitment. In consideration
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of the commitment of each of the Purchasers to purchase Series C Preferred and
Series C Warrants pursuant to this Agreement, the Company shall deliver to the
Purchasers concurrently with the execution of this Agreement warrants to
purchase an aggregate of 600,000 shares of Common Stock, $.001 par value, at a
purchase price of $.01 per share. The warrants shall be in the form of Exhibit
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D to this Agreement (the "COMMON WARRANTS") and the number of Common Warrants
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delivered to each Purchaser shall be as set forth opposite such Purchaser's name
on the Schedule of Purchasers.
1.5 Amendment and Restatement of the Stockholder Rights Agreement.
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Concurrently with the execution and delivery of this Agreement and the issuance
of the Common Warrants, the Company and each of the Purchasers shall execute and
deliver the Amended and Restated Stockholder Rights Agreement in the form
attached hereto as Exhibit E (the "AMENDED AND RESTATED STOCKHOLDER RIGHTS
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AGREEMENT").
SECTION 2
Closing Dates; Delivery
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2.1 Closing Dates.
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(a) First Closing Date. The closing of the purchase and sale of the
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Series C Preferred to Intel hereunder (the "FIRST CLOSING") shall be held
concurrently with the closing of the High Yield Offering on the date of the
closing of the High Yield Offering (provided that such closing date occurs on or
before April 30, 1998) or on such later date as the Company and Intel may
mutually agree (the "FIRST CLOSING DATE"). The place of the First Closing
(including the place of delivery to Intel by the Company of the certificates
evidencing all shares of Series C Preferred being purchased by Intel and the
place of payment to the Company by Intel of the purchase price therefor) shall
be the offices of Xxxxxx Xxxxxxx Xxxxxxxx & Xxxxxx, 000 Xxxx Xxxx Xxxx, Xxxx
Xxxx, Xxxxxxxxxx 00000-0000, or such other place as Intel and the Company may
mutually agree.
(b) Second Closing Date. The closing of the purchase and sale of the
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Series C Preferred and Series C Warrants hereunder to Warburg and Crosspoint and
the closing of the sale of the Series C Warrants to Intel (the "SECOND CLOSING")
shall be held at 1:00 p.m., California Time, on the fifteenth (15th) day after
delivery of the Exercise Notice (or if such date is not a business day then on
the next business day thereafter) or on such later date as the Company and the
Purchasers may mutually agree to, but in any event no later than the Final
Closing Date (the date of such Closing being referred to as the "SECOND CLOSING
DATE"). The place of the Second Closing (including the place of delivery to
Warburg and Crosspoint by the Company of the certificates evidencing all shares
of Series C Preferred and Series C Warrants being purchased by them and the
place of payment to the Company by Warburg
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and Crosspoint of the purchase price therefor and the place of delivery to Intel
by the Company of the Series C Warrants being purchased by Intel) shall be the
offices of Xxxxxx Xxxxxxx Xxxxxxxx & Xxxxxx, 000 Xxxx Xxxx Xxxx, Xxxx Xxxx,
Xxxxxxxxxx 00000-0000, or such other place as such Purchasers and the Company
may mutually agree.
2.2 Delivery.
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(a) First Closing. At the First Closing, the Company will deliver to
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Intel a certificate or certificates representing the number of Shares designated
on the Schedule of Purchasers to be purchased by Intel, against payment of the
purchase price therefor, by check or wire transfer, in the amount specified on
the Schedule of Purchasers.
(b) Second Closing. At the Second Closing, the Company will deliver
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to each of Warburg and Crosspoint a certificate or certificates representing the
number of Shares and a Series C Warrant evidencing the number of Series C
Warrants designated on the Schedule of Purchasers to be purchased by such
Purchaser, against payment of the purchase price therefor, by check or wire
transfer, in the amount specified on the Schedule of Purchasers. At the Second
Closing, the Company will also deliver to Intel a Series C Warrant evidencing
the number of Series C Warrants designated on the Schedule of Purchasers
purchased by Intel.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants, subject to such exceptions as
are specifically disclosed in the disclosure letter (referencing the appropriate
section and paragraph numbers) supplied by the Company and attached hereto as
Exhibit F (the "DISCLOSURE LETTER") and dated as of the date hereof, as follows:
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3.1 Organization of the Company. Each of the Company and its wholly-owned
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subsidiaries Covad Communications Company, a California corporation, and DIECA
Communications, Inc., a Virginia corporation (collectively, the "SUBSIDIARIES")
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each of the Company and each of
the Subsidiaries has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition, results of operations or prospects of the Company and the
Subsidiaries, taken as a whole (hereinafter referred to as a "MATERIAL ADVERSE
EFFECT"). The Company has delivered a true and correct copy of its Certificate
of Incorporation and Bylaws, each as amended to date, to the Purchasers.
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3.2 Company Capital Structure.
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(a) The authorized capital stock of the Company consists of 30,000,000
shares of authorized Common Stock, $.001 par value, of which 3,787,068 shares
are issued and outstanding, and 15,000,000 shares of Preferred Stock, $.001 par
value, of which 250,000 shares are designated Series A Preferred Stock, all of
which are outstanding, 5,700,001 shares are designated Series B Preferred, all
of which are outstanding, and 3,716,429 shares are designated Series C
Preferred, none of which are outstanding (collectively, the "COMPANY CAPITAL
STOCK"). All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable, are not subject to preemptive
rights created by statute, the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is bound
and have been issued in compliance with federal and state securities laws. The
Company has no other capital stock authorized, issued or outstanding.
(b) The Series C Preferred to be purchased by the Purchasers
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, the Series C Preferred
issuable upon exercise of the Series C Warrants, when issued, sold and delivered
in accordance with the terms of the Series C Warrants for the consideration
expressed therein, and the Common Stock issuable upon exercise of the Common
Warrants when issued, sold and delivered in accordance with the terms of the
Common Warrants for the consideration expressed therein and the Series C
Warrants and the Common Warrants when issued, sold and delivered in accordance
with the terms of the Agreement for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and any Related Agreement (as defined in Section 3.4 hereof) and under
applicable state and federal securities laws. The Common Stock issuable upon
conversion of the Series C Preferred being purchased under this Agreement and
issuable upon exercise of the Series C Warrants and issuable upon exercise of
the Common Warrants has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Certificate of Incorporation or the
Common Warrants, as applicable, will be duly and validly issued, fully paid and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and any Related Agreement and
under applicable state and federal securities laws.
(c) Except for the Company's 1997 Stock Option Plan (the "OPTION
PLAN"), the Company has never adopted or maintained any stock option plan or
other plan providing for equity compensation of any person. The Company has
reserved 1,756,750 shares of Company Capital Stock for issuance to employees,
directors and consultants pursuant to the Option Plan, 1,531,950 of which are
subject to outstanding options under the Option Plan. Except for the Series C
Warrants, the Common Warrants, and the warrants to purchase Common Stock to be
issued in connection with the High Yield Offering, there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which the Company is a party or by which it is bound obligating the
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of the
Company or obligating the Company to grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement. There are no outstanding or authorized
stock appreciation,
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phantom stock, profit participation, or other similar rights with respect to the
Company. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting stock of the Company.
3.3 Subsidiaries. The Company does not have, and never has had, any
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subsidiaries or affiliated companies other than the Subsidiaries and does not
otherwise own, and has not otherwise owned, any shares in the capital of or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture, limited liability company or other
business entity. The Company owns all outstanding shares of stock of the
Subsidiaries, free and clear of all liens, pledges, charges, claims, restriction
on transfer, mortgages, security interests or other encumbrances of any sort
(collectively, "LIENS"). All outstanding shares of the Subsidiaries are owned
by the Company and are duly authorized, validly issued, fully paid and
nonassessable. There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which any Subsidiary is a party
or by which it is bound obligating such Subsidiary to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of any Subsidiary or obligating any
Subsidiary to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement.
3.4 Authority. The Company has all requisite power and authority to enter
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into this Agreement, the Series C Warrants, the Common Warrants, and each of the
Related Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement,
the Series C Warrants, the Common Warrants and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company, and no
further action is required on the part of the Company or any of their respective
officers, directors, or stockholders to authorize the Agreement, the Series C
Warrants, the Common Warrants, the Related Agreements and the transactions
contemplated hereby and thereby. This Agreement, the Series C Warrants, the
Common Warrants and the Related Agreements have been duly executed and delivered
by the Company and, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, constitute the valid and binding
obligation of the Company, enforceable in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies. The "RELATED
AGREEMENTS" shall mean all such ancillary agreements required in this Agreement
to be executed and delivered in connection with the transactions contemplated
hereby, including the Amended and Restated Stockholder Rights Agreement.
3.5 No Conflict. The execution and delivery of this Agreement, the Series
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C Warrants, the Common Warrants and the Related Agreements by the Company do
not, and the consummation of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "CONFLICT") (i) any provision of
the Certificate or Articles of Incorporation and Bylaws of the Company or any
Subsidiary, (ii) any mortgage, indenture, lease, contract or other agreement
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or instrument, permit, concession, franchise or license to which the Company or
any Subsidiary or any of their respective properties or assets are subject, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or the Subsidiaries or their respective properties or
assets.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
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registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any
third party, including a party to any agreement with the Company or any
Subsidiary (so as not to trigger any Conflict), is required by or with respect
to the Company or any Subsidiary in connection with the execution and delivery
of this Agreement, the Series C Warrants, the Common Warrants and the Related
Agreements or the consummation of the transactions contemplated hereby and
thereby, except for such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws, which will be timely filed within the applicable periods
therefor. The Company has not offered shares of its Series C Preferred or any
substantially similar securities of the Company for sale to, or solicited any
offers to buy from, or otherwise approached or negotiated in respect thereof
with, any person other than the Purchasers, and the Company will not take any
action that will cause the issuance and delivery of the shares of its Series C
Preferred and Common Stock as contemplated hereby to constitute a violation of
the Securities Act or the California Corporate Securities Law of 1968, as
amended.
3.7 Company Financial Statements. Section 3.7 of the Disclosure Letter
----------------------------
sets forth the Company's balance sheets as of December 31, 1997, (the "CURRENT
BALANCE SHEET") and the related audited statements of income and cash flow for
the twelve-month period ended December 31, 1997, (collectively the "COMPANY
FINANCIALS"). The Company Financials are correct in all material respects and
have been prepared in accordance with U.S. generally accepted accounting
principles consistent with the reporting practices and principles ("GAAP"),
applied on a basis consistent throughout the periods indicated and consistent
with each other. The Company Financials present fairly the financial condition,
operating results and cash flows of the Company as of the dates and during the
periods indicated therein.
3.8 No Undisclosed Liabilities. Except as set forth in Section 3.8 of the
--------------------------
Disclosure Letter, the Company does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet, or (ii) has not arisen in the ordinary course of business
consistent with past practices since December 31, 1997.
3.9 No Changes. Except as set forth in Section 3.9 of the Disclosure
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Letter or as contemplated by this Agreement, since December 31, 1997, there has
not been, occurred or arisen any:
(a) transaction by the Company or any Subsidiary except in the
ordinary course of business as conducted on that date and consistent with past
practices;
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(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company or the Articles of Incorporation or Bylaws of any
Subsidiary;
(c) capital expenditure or commitment by the Company or the
Subsidiaries, either individually or in the aggregate, exceeding $50,000.
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company or the Subsidiaries (whether or not covered by
insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company or the
Subsidiaries;
(g) revaluation by the Company or the Subsidiaries of any of their
respective assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company or the Subsidiaries to any of their respective officers,
directors, employees or advisors, or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company or the Subsidiaries of a
bonus or other additional salary or compensation to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"COMPANY AGREEMENT") or any extension or modification the terms of any Company
Agreement which (i) involves the payment by the Company or the Subsidiaries of
greater than $50,000 per annum or which extends for more than one (1) year, (ii)
involves any payment or obligation to any affiliate of the Company, or (iii)
involves the sale of any material assets of the Company or the Subsidiaries;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company or the Subsidiaries, or any creation of any security
interest in such assets or properties except in the ordinary course of business
as conducted on that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company or any Subsidiary is a party or by which it is
bound;
(m) loan by the Company or any Subsidiary to any person or entity,
incurring by the Company or any Subsidiary of any indebtedness, guaranteeing by
the Company or any Subsidiary of any indebtedness, issuance or sale of any debt
securities of the Company or any Subsidiary or guaranteeing
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of any debt securities of others, except for advances to employees for travel
and business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company or any
Subsidiary, including any write-off or other compromise of any account
receivable of the Company or such Subsidiary;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against the Company or the Subsidiaries or their
respective affairs;
(p) notice of any claim of ownership by a third party of any
Intellectual Property (as defined in Section 3.13 below) of the Company or the
Subsidiaries or of infringement by the Company or any Subsidiary of any third
party's Intellectual Property rights;
(q) issuance or sale, or contract to issue or sell, by the Company or
any Subsidiary of any of its shares of capital stock, or securities
exchangeable, convertible or exercisable therefor, or of any other of its
securities except pursuant to the Company's incentive stock plans;
(r) change in pricing or royalties set or charged by the Company or
any Subsidiary to their respective customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property (as
defined in Section 3.13 below) to the Company or the Subsidiaries;
(s) any event or condition of any character that has had a Material
Adverse Effect on the Company or the Subsidiaries; or
(t) negotiation or agreement by the Company or any Subsidiary or any
officer or employees thereof to do any of the things described in the preceding
clauses (a) through (s) (other than negotiations with the Purchasers and their
representatives regarding the transactions contemplated by this Agreement).
3.10 Tax Matters. Each of the Company and the Subsidiaries has timely
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filed all tax returns and reports (federal, state and local) as required by law.
These returns and reports are true and correct in all material respects. The
Company and the Subsidiary have paid all taxes and other assessments due, except
those contested by them in good faith and which are described in Section 3.10 of
the Disclosure Letter. The provision for taxes of the Company or the
Subsidiaries as shown in the Financial Statements is adequate for taxes due or
accrued as of the date thereof. Neither the Company nor any Subsidiary has
elected pursuant to the Internal Revenue Code of 1986, as amended ("CODE"), to
be treated as an S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor have they made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation, or amortization) that would have a material effect on
the business, properties, prospects, or financial condition of the Company and
the Subsidiaries, taken as a whole. Neither the Company nor the Subsidiaries has
ever had any tax deficiency proposed or assessed against it, nor have they
executed any waiver of any statute of limitations on the assessment or
collection of any
-9-
tax or governmental charge. None of the Company's or the Subsidiaries' federal
income tax returns and none of their state income or franchise tax or sales or
use tax returns have ever been audited by governmental authorities. Since the
date of the Financial Statements, the Company has made adequate provisions on
its books of account for all taxes, assessments, and governmental charges with
respect to its business, properties, and operations for such period. The Company
and the Subsidiaries have withheld or collected from each payment made to each
of its employees, the amount of all taxes, including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes required to be withheld or collected therefrom, and
have paid the same to the proper tax receiving officers or authorized
depositaries. Neither the Company nor any Subsidiary is a real property holding
corporation within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.
3.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompetition or otherwise), commitment, judgment, injunction, order or decree
to which the Company or any Subsidiary is a party or otherwise binding upon the
Company or any Subsidiary that has or may have the effect of prohibiting or
impairing any business practice of the Company or the Subsidiaries, any
acquisition of property (tangible or intangible) by the Company or the
Subsidiaries or the conduct of business by the Company or the Subsidiaries.
Without limiting the foregoing, neither the Company nor any Subsidiary has
entered into any agreement under which the Company or such Subsidiary is
restricted from manufacturing or selling any product or providing services to
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market.
3.12 Title of Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) Neither the Company nor any Subsidiary owns any real property, nor
has either the Company or any Subsidiary ever owned any real property. Section
3.12(a) of the Disclosure Letter sets forth a list of all real property
currently leased by the Company or the Subsidiaries, the name of the lessor, the
date of the lease and each amendment thereto and, with respect to any current
lease, the aggregate annual rental and/or other fees payable under any such
lease. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default).
(b) The Company and the Subsidiaries have good and valid title to, or,
in the case of leased properties and assets, valid leasehold interests in, all
of their respective tangible properties and assets, real, personal and mixed,
used or held for use in their respective businesses, free and clear of any
Liens, except as reflected in the Current Balance Sheet and except for liens for
taxes not yet due and payable and such imperfections of title and encumbrances,
if any, which are not material in character, amount or extent, and which do not
detract from the value, or interfere with the present use, of the property
subject thereto or affected thereby.
3.13 Intellectual Property. To the knowledge of the Company, the Company
---------------------
or the Subsidiaries own and possess or are licensed under all patents, patent
applications, licenses, trademarks,
-10-
trade secrets, trade names, brand names, inventions and copyrights or other
proprietary rights ("INTELLECTUAL PROPERTY") employed in the operation of their
respective businesses as now conducted, and as currently planned to be
conducted, and to the knowledge of the Company, with no infringement of or
conflict with the rights of others respecting any of the same. Section 3.13 of
the Disclosure Letter sets forth all of the patents applied for by the Company
as of the date hereof. Neither the Company nor any Subsidiary has received any
communications alleging that the Company or any Subsidiary has violated any of
the Intellectual Property of any other person or entity, nor is the Company
aware of any basis for the foregoing. Reasonable security measures have been
taken by the Company and the Subsidiaries to protect the secrecy,
confidentiality and value of the Company's and the Subsidiaries' trade secrets,
including their respective know-how, technology, concepts and other technical
data for the development, processing, manufacture and sale of its products. Each
employee of and consultant to the Company or the Subsidiaries has executed an
invention assignment and confidentiality agreement substantially in the form
provided to the Purchasers.
3.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth on Section 3.14(a) of the Disclosure Letter or
the Financial Statements, neither the Company nor any Subsidiary has or is bound
by:
(i) any contract, license or agreement to which the Company or
any Subsidiary is a party (A) with respect to Intellectual Property of the
Company licensed or transferred to any third party or (B) pursuant to which a
third party has licensed or transferred any Intellectual Property to the Company
or any Subsidiary, with a potential value or cost in excess of $50,000;
(ii) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(iii) any agreement or plan, including, without limitation,
any stock option plan, stock appreciation rights plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement;
(iv) any fidelity or surety bond or completion bond;
(v) any lease of personal property with fixed annual rental
payments in excess of $50,000;
(vi) any contract, license or agreement between the Company
or any Subsidiary and any third party wherein or whereby the Company or such
Subsidiary has agreed to, or assumed, any obligation or duty to warrant,
indemnify, hold harmless or otherwise assume or incur any
-11-
obligation or liability with respect to the infringement or misappropriation by
the Company or such Subsidiary or such third party of the Intellectual Property
of any third party;
(vii) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company or any Subsidiary to engage in any
line of business or to compete with any person;
(viii) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $50,000;
(ix) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's or the Subsidiaries' businesses;
(x) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit;
(xi) any purchase order or contract for the purchase of
materials involving $50,000 or more;
(xii) any construction contracts;
(xiii) any distribution, joint marketing or development
agreement; or
(xiv) any other agreement, contract or commitment that
involves $50,000 or more or is not cancelable without penalty within thirty (30)
days.
(b) Each of the Company and each of the Subsidiaries is in compliance
with and has not breached, violated or defaulted under, or received notice that
it has breached, violated or defaulted under, any of the terms or conditions of
any agreement, contract, license or commitment to which it is a party or by
which it is bound (any such agreement, contract, license or commitment, a
"CONTRACT"), and neither the Company nor any Subsidiary is aware of any event
that would constitute such a breach, violation or default with the lapse of
time, giving of notice or both. Each Contract is in full force and effect and,
except as otherwise disclosed in Section 3.14(b) of the Disclosure Letter, to
the knowledge of the Company, all other parties to each Contract are in
compliance with, and have not breached any term of, such Contract. The Company
and the Subsidiaries have obtained, or will obtain prior to the Closing Date,
all necessary consents, waivers and approvals of parties to any Contract as are
required to remain in effect without modification after the Closing.
3.15 Interested Party Transactions. To the knowledge of the Company, no
-----------------------------
officer, director or stockholder of the Company or the Subsidiary (nor any
ancestor, sibling, descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) any interest in any
entity that furnished or sold, or
-12-
furnishes or sells, services or products that the Company or any Subsidiary
furnishes or sells, or proposes to furnish or sell, or (ii) any interest in any
entity that purchases from or sells or furnishes to the Company or such
Subsidiary any goods or services or (iii) a beneficial interest in any Contract;
provided, however, that ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation and no more than five
percent (5%) of the outstanding equity of any other entity shall not be deemed
an "INTEREST IN ANY ENTITY" for purposes of this Section 3.15.
3.16 Governmental Authorization. The Company or one of the Subsidiaries
--------------------------
holds all consents, licenses, permits, grants or other authorizations by a
governmental entity (i) pursuant to which the Company or such Subsidiary
currently operates or holds any interest in any of its properties or (ii) which
is required for the operation of their business or the holding of any such
interest except where the failure to hold such consent, license, permit, grant
or other authorization would not have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole (herein collectively called "COMPANY
AUTHORIZATIONS"). The Company Authorizations are in full force and effect and
constitute all Company Authorizations required to permit the Company and its
Subsidiaries to operate or conduct their business or hold any interest in their
properties or assets, except where the failure to have such Company
Authorizations would not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
3.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the knowledge of the Company, threatened against the Company or
any Subsidiary, their respective properties or any of their respective officers
or directors, nor, to the knowledge of the Company, is there any reasonable
basis therefor. There is no investigation pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary, their respective
properties or any of their respective officers or directors (nor, to the
knowledge of the Company, is there any reasonable basis therefor) by or before
any governmental entity. No governmental entity has at any time challenged or
questioned the legal right of the Company or any Subsidiary to conduct their
respective operations as presently or previously conducted.
3.18 Employees; Employee Compensation. To the Company's knowledge, there
--------------------------------
is no strike, labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's or the
Subsidiaries' employees belongs to any union or collective bargaining unit. To
the Company's knowledge, the Company and the Subsidiaries have complied in all
material respects with all applicable state and federal equal opportunity and
other laws related to employment. To the Company's knowledge, no employee of
the Company or any Subsidiary is or will be in violation of any judgment,
decree, or order, or any term of any employment contract, patent disclosure
agreement, or other contract or agreement relating to the relationship of any
such employee with the Company or such Subsidiary, or any other party because of
the nature of the business conducted or presently proposed to be conducted by
the Company or the Subsidiaries or to the use by the employee of his or her best
efforts with respect to such business. Neither the Company nor any Subsidiary
is a party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate
-13-
their employment with the Company or a Subsidiary, nor do the Company or any
Subsidiary have a present intention to terminate the employment of any of the
foregoing. Subject to general principles related to wrongful termination of
employees, the employment of each officer and employee of the Company or the
Subsidiaries is terminable at the will of the Company or any such Subsidiary.
3.19 Minute Books. The minute books of the Company and the Subsidiaries
------------
made available to counsel for Purchasers are the only minutes of the Company and
the Subsidiaries and contain a reasonably accurate summary of all meetings of
the Board of Directors (or committees thereof) of the Company and the
Subsidiaries and their respective stockholders or actions by written consent
since the incorporation of the Company and the Subsidiaries.
3.20 Environmental Matters.
---------------------
(a) Hazardous Material. Neither the Company nor any Subsidiary has:
(i) operated any underground storage tanks at any property that the Company or
such Subsidiary has at any time owned, operated, occupied or leased; or (ii)
illegally released any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, and urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and Recovery
Act of 1976, as amended, and the regulations promulgated pursuant to said laws
(a "HAZARDOUS MATERIAL"), but excluding office and janitorial supplies properly
and safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or any Subsidiary or, to the Company's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company or any Subsidiary has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Neither the Company nor any
Subsidiary has transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to Hazardous Materials in violation of any law
in effect on or before the date hereof, nor has the Company or any Subsidiary
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (any or all of the foregoing being collectively referred to
as "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation,
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(c) Permits. The Company or a Subsidiary currently holds all
environmental approvals, permits, licenses, clearances and consents (the
"ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's or the
Subsidiaries' Hazardous Materials Activities and other businesses of the Company
and the Subsidiaries as such activities and businesses are currently being
conducted except where the failure to hold such Environmental Permits would not
have a Material Adverse Effect on the Company and the Subsidiaries taken as a
whole.
-14-
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company or the Subsidiaries.
The Company is not aware of any fact or circumstance which could involve the
Company or any Subsidiary in any environmental litigation or impose upon the
Company or such Subsidiary any environmental liability.
3.21 Brokers' and Finders' Fees; Third Party Expenses. Neither the Company
------------------------------------------------
nor any Subsidiary has incurred, nor will incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
3.22 Registration Rights. Other than as granted pursuant to the
-------------------
Stockholder Rights Agreement, the Company has not granted or agreed to grant any
rights to register, as that term is defined in the Stockholder Rights Agreement,
including piggyback registration rights, to any person or entity.
3.23 No Interference or Conflict. To the knowledge of the Company, no
---------------------------
shareholder, officer, employee or consultant of the Company or any Subsidiary is
obligated under any contract or agreement or subject to any judgment, decree or
order of any court or administrative agency, that would interfere with such
person's efforts to promote the interests of the Company or the Subsidiaries or
that would interfere with the Company's or the Subsidiaries' business. Neither
the execution nor delivery of this Agreement, nor the carrying on of the
Company's or the Subsidiaries' business as presently conducted or proposed to be
conducted nor any activity of such officers, directors, employees or consultants
in connection with the carrying on of the Company's or the Subsidiaries'
business as presently conducted or proposed to be conducted, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, employees or consultants
are currently bound.
3.24 Insurance. Section 3.24 of the Disclosure Letter lists all insurance
---------
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company and the
Subsidiaries. There is no claim by the Company or the Subsidiary pending under
any of such policies or bonds as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
its Affiliates are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company has no knowledge of any threatened termination of, or
premium increase with respect to, any of such policies.
3.25 Regulatory Matters.
------------------
(a) (i) The execution and delivery of this Agreement by the Company,
the performance of the Company's obligations hereunder, and the consummation of
the transactions contemplated hereby and thereby, do not violate (1) the
Communications Act of 1934 (the
-15-
"COMMUNICATIONS ACT") or interpreted as of this date, (2) the Telecommunications
Act of 1996 (the "TELECOM ACT OF 1996") or interpreted as of this date, (3) any
rules or regulations of the Federal Communications Commission (the "FCC")
applicable to the Company or the Subsidiary or interpreted as of this date, or
(4) any rules or regulations of the California Public Utilities Commission, New
York Public Service Commission, Massachusetts Department of Public Utilities,
Washington Utilities and Transportation Commission, Illinois Commerce Commission
or the Oregon Public Utilities Commission (the "STATE COMMISSIONS") or
interpreted as of this date, and (ii) no authorization of or filing with the FCC
or any of the State Commissions is necessary for the execution and delivery of
this Agreement by the Company and consummation of the transactions contemplated
hereby in accordance with the terms hereof;
(b) (i) The Company and each Subsidiary in all material respects (1)
have made all reports and filings, and paid all fees, required by the FCC and
any of the State Commissions; and (2) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from, and have made all
filings and registrations with, the FCC and any of the State Commissions
necessary to own, lease, license and use their properties and assets and to
conduct their businesses as presently conducted and as proposed to be conducted;
and (ii) neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect of
which would have a Material Adverse Effect on the Company and the Subsidiaries
taken as a whole;
(c) To the Company's knowledge, neither the Company nor any Subsidiary
is in violation of, or in default under, the Communications Act, as amended by
the Telecom Act of 1996, the rules or regulations of the FCC, or the rules or
regulations of any of the State Commissions, the effect of which, singly or in
the aggregate, would have a Material Adverse Effect on Company and the
Subsidiaries taken as a whole; and
(d) (i) no decree or order of the FCC or any of the State Commissions
is outstanding against the Company or the Subsidiary and (ii) to the Company's
knowledge, no formal litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no formal notice of violation or order to show
cause has been issued, against the Company or the Subsidiary before the FCC or
any of the State Commissions.
3.26 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by the Purchasers or their counsel.
3.27 Representations Complete. None of the representations or warranties
------------------------
made by the Company (as modified by the Disclosure Letter), nor any statement
made in any schedule or certificate furnished by the Company pursuant to this
Agreement, contains any untrue statement of a material fact, or omits to state
any material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
-16-
SECTION 4
Representations and Warranties of the Purchasers
------------------------------------------------
Each Purchaser, severally but not jointly, hereby represents and warrants
to the Company with respect to its purchase of the Shares, the Series C Warrants
and the Common Warrants, as follows:
4.1 Investment Representations and Covenants of the Purchasers.
----------------------------------------------------------
(a) This Agreement is made by the Company with each Purchaser in
reliance upon such Purchaser's representations and covenants made in this
Section 4, which by its execution of this Agreement each Purchaser hereby
confirms. Such Purchaser represents that the Shares, the Common Warrants and
the Series C Warrants to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
(b) Such Purchaser understands and acknowledges that the offering of
the Shares, the Common Warrants and the Series C Warrants pursuant to this
Agreement will not, and any issuance of Common Stock on conversion or exercise
thereof may not, be registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt pursuant to Section 4(2) of the Securities Act, and that the Company's
reliance on such exemption is predicated on the Purchasers' representations set
forth herein.
(c) Such Purchaser represents that it is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions such
as the one contemplated by this Agreement, has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its prospective investment in the Company.
(d) Such Purchaser acknowledges and understands that the Shares, the
Common Warrants and the Series C Warrants, and any Common Stock acquired upon
the conversion or exercise thereof, must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available, and that, except as otherwise provided in the Related
Agreements, the Company is under no obligation to register either the Shares,
the Common Warrants and the Series C Warrants or Common Stock issuable upon
conversion or exercise thereof.
(e) Such Purchaser acknowledges that it has received and reviewed a
copy of Rule 144 promulgated under the Securities Act, which permits limited
public resales of securities acquired in a non-public offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that before the
Shares, or any Common Stock issued upon conversion thereof, may be sold under
Rule 144, the following conditions must be fulfilled, except as otherwise
described below: (i) certain public information about the Company must be
available; (ii) the sale must occur at least one year after the later of the
date the Shares were sold by the Company or the date they were sold by an
-17-
affiliate of the Company; (iii) the sale must be made in a broker's transaction;
and (iv) the number of Shares sold must not exceed certain volume limitations.
If, however, the sale occurs at least two years after the Shares were sold by
the Company or an affiliate of the Company, and if the Purchaser is not an
affiliate of the Company, the foregoing conditions will not apply. The
Purchaser understands that the time period for resale of Shares or Common Stock
issued upon exercise of the Common Warrants or the Series C Warrants does not
begin until the Warrants are exercised unless the net exercise provisions of the
Warrants are used. Such Purchaser understands that the current information
referred to above is not now available and the Company has no present plans to
make such information available.
(f) Such Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of its stock. Such Purchaser understands that although Rule 144 is
not exclusive, the Securities and Exchange Commission has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
(g) Such Purchaser covenants that, in the absence of an effective
registration statement covering the stock in question, it will sell, transfer or
otherwise dispose of the Shares, the Common Warrants, the Common Warrants and
any Common Stock issued on conversion or exercise thereof only in a manner
consistent with its representations and covenants set forth in this Section. In
connection therewith such Purchaser acknowledges that the Company shall make a
notation on its stock books regarding the restrictions on transfer set forth in
this Section and shall transfer shares and warrants on the books of the Company
only to the extent not inconsistent therewith.
(h) Such Purchaser represents that it is an "ACCREDITED INVESTOR" as
such term is defined in Rule 501 under the Securities Act.
4.2 No Public Market. Such Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company.
4.3 Domicile. Warburg, Xxxxxx Ventures, L.P. is domiciled in the state of
--------
New York. The remainder of the Purchasers are domiciled in the state of
California.
4.4 Authority. Each Purchaser has all requisite power and authority to
---------
enter into this Agreement, the Series C Warrants, the Common Warrants, and each
of the Related Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement, the Series C Warrants (in the case of Warburg and Crosspoint),
the Common Warrants and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate or partnership action on the part of the Purchaser, and no
further action is required on the part of the Purchaser, or any of Purchaser's
respective officers, directors, stockholders, limited partners or general
partners, to authorize the Agreement, the
-18-
Series C Warrants, the Common Warrants, the Related Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Related
Agreements have been duly executed and delivered by the Purchaser and, assuming
the due authorization, execution and delivery by the Company, constitute the
valid and binding obligation of the Purchaser, enforceable in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies.
SECTION 5
Conditions to Closing of Purchasers
-----------------------------------
5.1 Conditions to Closing of Intel. Intel's obligations to purchase the
------------------------------
Shares at the First Closing and, if applicable, the Series C Warrants at the
Second Closing are, at the option of Intel, subject to the fulfillment on or
prior to the First Closing Date of the following conditions:
(a) Opinion of Company's Counsel. Intel shall have received from
----------------------------
counsel to the Company an opinion addressed to it in a form customary for
preferred equity venture financings, dated the First Closing Date, in the form
of Exhibit G-1.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Common Stock issuable
upon conversion of the Shares.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the First Closing.
(d) Stock Certificates. The Company shall have delivered to Intel a
------------------
certificate for the number of shares of Series C Preferred set forth opposite
its name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
(f) Equity Commitment. This Agreement shall not have been terminated
-----------------
by either the Company, Warburg or Crosspoint and the obligations of the Company,
Warburg and Crosspoint hereunder shall continue to be in full force and effect.
5.2 Conditions to Closing of Warburg and Crosspoint. Warburg's and
-----------------------------------------------
Crosspoint's respective obligations to purchase the Shares and the Series C
Warrants at the Second Closing are, at the option of each such Purchaser,
subject to the fulfillment on or prior to the Second Closing Date of the
following conditions:
-19-
(a) Opinion of Company's Counsel. Such Purchasers shall have received
----------------------------
from counsel to the Company, an opinion addressed to them, dated the Second
Closing Date, in the form of Exhibit G-2.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Series C Warrants and the
Common Stock issuable upon conversion of the Shares and the Series C Warrants.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the Closing.
(d) Stock Certificates and Series C Warrants. The Company shall have
----------------------------------------
delivered to such Purchaser a certificate for the number of shares of Series C
Preferred and a Series C Warrant for the number of Series C Warrants set forth
opposite such Purchaser's name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
SECTION 6
Conditions to Closing of Company
--------------------------------
There shall be no conditions to the Company's obligation to sell and issue
the Series C Preferred to Intel at the First Closing and the Series C Warrants
to Intel at the Second Closing, and there shall be no conditions to the
Company's obligation to sell and issue the Series C Preferred and the Series C
Warrants to Warburg and Crosspoint at the Second Closing if the Company has
delivered the Exercise Notice.
SECTION 7
Miscellaneous
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as applied to contracts entered into solely
between residents of and to be performed entirely in such state.
7.2 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby. Each Purchaser hereby agrees
and acknowledges that the representations and warranties of the
-20-
Company shall only be made as of the date of the Agreement and shall not be made
as of any subsequent date, including but not limited to as of any closing.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the obligations of a Purchaser to purchase Shares and
Series C Warrants shall not be assignable.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by registered or certified
mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's
address set forth in Exhibit A, or at such other address as such Purchaser shall
---------
have furnished to the Company in writing, or (b) if to any other holder of any
Shares or Series C Warrants, at such address as such holder shall have furnished
the Company in writing, or, until any such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Shares or Series
C Warrants who has so furnished an address to the Company, or (c) if to the
Company to its address set forth on the cover page of this Agreement and
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Purchasers.
7.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any holder of any Shares or Series C Warrants, upon
any breach or default of the Company under this Agreement, shall impair any such
right, power or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, or of or in any
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
-----------------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS AN
-21-
EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO
THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
OR SUCH EXEMPTION BEING AVAILABLE.
7.8 Expenses. The Company and the Purchasers shall each bear their own
--------
expenses and legal fees with respect to this Agreement and the transactions
contemplated hereby; provided the Company will pay at the execution of this
Agreement the reasonable legal fees and expenses of the Purchasers, including
the reasonable legal fees and expenses of counsel to Intel (up to a maximum of
$20,000).
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
7.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.11 Gender. The use of the neuter gender herein shall be deemed to
------
include the masculine and the feminine gender, if the context so requires.
7.12 Confidentiality. Each party hereto agrees that, except with the prior
---------------
written permission of the other parties, it shall at all times keep confidential
and not divulge, furnish or make accessible to anyone any confidential
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties to which such party has been or shall
become privy by reason of this Agreement.
7.13 Enforceability; Specific Performance; Damages. Each of the Purchasers
---------------------------------------------
acknowledges that (i) the commitment of the Purchaser to purchase Series C
Preferred and, in the case of Warburg and Crosspoint, Series C Warrants
contained in this Agreement is required for the Company to complete the High
Yield Offering; (ii) the Company has relied on such commitment in completing the
High Yield Offering; and (iii) a breach of any commitment or any other provision
of this Agreement will result in irreparable harm and damages to the Company
which cannot be adequately compensated by a monetary award. Accordingly, it is
expressly agreed that in addition to all other remedies available at law or in
equity, including a remedy for damages, the Company shall be entitled to the
immediate remedy of such other form of injunctive or equitable relief as may be
used by any court of competent jurisdiction to specifically enforce the
provisions hereof.
7.14 Jurisdiction and Venue. Each party agrees that the Federal courts for
----------------------
the Northern District of California [San Xxxx] shall have the exclusive
jurisdiction and venue for any disputes under this Agreement including the
Company's rights under Section 7.13. Each Purchaser hereby consents to the
personal jurisdiction in such Northern District of California [San Xxxx]. Each
Purchaser agrees
-22-
that a judgment in such courts shall be enforceable in any other jurisdiction
where Purchaser may reside or be located.
7.15 Termination. This Agreement may not be terminated by any Purchaser or
-----------
the Company, except that the Company or any Purchaser may terminate this
------ ----
Agreement upon written notice of such party to all other parties (i) at any time
after April 30, 1998, if the High Yield Offering has not been completed by such
date or (ii) solely with respect to the obligations of the Company and Warburg
and Crosspoint with respect to their respective obligations under Section 1.3
hereof, at any time after the closing of the High Yield Offering if the Company
has completed a Replacement Financing.
-23-
The foregoing Series C Preferred Stock and Warrant Subscription Agreement
is hereby executed as of the date first above written.
"COMPANY" COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By: /s/ Xxxxxxx X. XxXxxx
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
PURCHASERS: WARBURG, XXXXXX VENTURES, L.P.
By: Warburg Pincus & Co., its General
Partner
By: /s/ Xxxxx Xxxxxxx
------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Xxxx Xxxxxxx
------------------------------------
Name: Xxxx Xxxxxxx
---------------------------------
Title: General Partner
--------------------------------
INTEL CORPORATION
By: /s/ Xxxxxx Xxxxxxx
------------------------------------
Name: Xxxxxx Xxxxxxx
---------------------------------
Title: Treasurer
--------------------------------
-24-
EXHIBIT A
---------
Schedule of Purchasers
----------------------
High Yield Commitment
Number of Number of
Number of Shares of Series C
Common Stock Series C Preferred Aggregate
Name and Address Warrants Preferred Stock Warrants Purchase Price
------------------------------------- ------------ --------------- ---------- --------------
Warburg, Xxxxxx Ventures, L.P. 451,773 1,537,105 1,261,200 $12,804,084.65
c/o X.X. Xxxxxxx, Xxxxxx & Co., LLC
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, XX 00000-0000
Crosspoint Venture Partners 1996. 112,943 384,276 315,300 $ 3,201,019.08
The Pioneer Hotel Building
0000 Xxxxxxxx Xxxx
Xxxxxxxx, XX 00000
Intel Corporation 35,284 120,048 98,500 $ 999,999.84
0000 Xxxxxxx Xxxxxxx Xxxxxxxxx
Mail Stop SC4-210
Xxxxx Xxxxx, XX 00000-0000
Attn: Treasurer
600,000 2,041,429 1,675,000 $17,005,103.57
-25-
ASSIGNMENT AND ASSUMPTION AGREEMENT
AND
FIRST AMENDMENT TO SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
This Assignment and Assumption Agreement and First Amendment to Series C
Preferred Stock and Warrant Subscription Agreement is made and entered into this
24th day of April, 1998 by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), Warburg, Xxxxxx Ventures L.P. ("Warburg"),
Crosspoint Venture Partners 1996 ("Crosspoint") and Xxxxxx Xxxx ("Assignee").
Capitalized terms used but not otherwise defined herein shall have their
respective meanings in the Subscription Agreement (as defined below).
RECITALS
WHEREAS, the Company, Warburg and Crosspoint are parties to that certain
Series C Preferred Stock and Warrant Subscription Agreement dated February 20,
1998 (the "Subscription Agreement"), pursuant to which the Company has the
unequivocal right to sell to Warburg and Crosspoint, and Warburg and Crosspoint
have the unequivocal obligation to purchase, severally and not jointly, the
number of Shares and the number of Series C Warrants specified opposite their
respective names on the Schedule of Purchasers attached thereto as Exhibit A
---------
(the "Schedule of Purchasers"), at any time from and after the closing of the
High Yield Offering to that date which is one year from the date of the closing
of the High Yield Offering;
WHEREAS, Warburg and Crosspoint now desire to assign their rights and
obligations with respect to the purchase of an aggregate of $100,000 of the
Shares and Series C Warrants specified opposite their respective names on the
Schedule of Purchaser's and Assignee now desires to assume such obligations and
to purchase $100,000 of such Shares and Series C Warrants. To effect the
foregoing assignment and assumption, the Company, Warburg and Crosspoint desire
to amend the Subscription Agreement to, among other things, (i) amend the
Schedule of Purchasers to reflect the foregoing assignment and assumption and
the purchase of the Shares and Series C Warrants as set forth in the amended
Schedule of Purchasers attached hereto as Exhibit A (the "Amended Scheduled of
Purchasers"), and (ii) to effect the sale and purchase of $100,000 of the Shares
and the Series C Warrants by the Company to Assignee.
NOW, THEREFORE, in consideration of the promises and agreements contained
in the Subscription Agreement and contained herein and the consideration
delivered by the parties hereto and thereto in accordance with this Agreement
and the Subscription Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
AGREEMENT
---------
1. Assignment and Assumption. Each of Warburg and Crosspoint, severally
-------------------------
and not jointly, assign to Assignee their respective rights and obligations
under Section 1.3 of the Subscription Agreement solely with respect to $100,000
of the Shares and the Series C Warrants as to which the Company has the
unequivocal right to sell to Warburg and Crosspoint and Warburg and Crosspoint
have the unequivocal obligation to purchase, subject to the terms and conditions
thereof. Assignee hereby assumes such rights and obligations to purchase
$100,000 of Shares and the Series C Warrants with respect to which Warburg and
Crosspoint have the obligation to purchase, and the Company shall have the
obligation to sell, shall be reduced to that number specified opposite their
respective names on the Schedule of Purchasers.
2. Sale of Shares of Series C Preferred to Assignee. Subject to the
------------------------------------------------
terms and conditions hereof and the Subscription Agreement, the Company hereby
issues and sells to Assignee, and Assignee hereby purchases from the Company,
the number of Shares of Series C Preferred and Series C Warrants specified
opposite Assignee's name on the Amended Schedule of Purchasers attached hereto
as Exhibit A, for the aggregate purchase price specified opposite his name on
---------
the Amended Schedule of Purchasers; provided, that the purchase and sale of such
Series C Warrants to Assignee shall be conditioned upon, and the delivery of
such Series C Warrants to Assignee shall be made concurrently with, the Second
Closing (as defined in the Subscription Agreement). It is understood that no
additional consideration shall be due with respect to the delivery of the Series
C Warrants to Assignee at such Second Closing. The Company's agreement with
Assignee is separate from its agreements with the other Purchasers under the
Subscription Agreement, and the sale of the Series C Preferred and the Series C
Warrants to Assignee is separate from the Company's sale of Series C Preferred
and Series C Warrants to the other Purchasers under the Subscription Agreement.
3. Amendment to Subscription Agreement.
-----------------------------------
(a) The Subscription Agreement shall be deemed to have been amended
by this Agreement solely (i) to replace the Schedule of Purchasers attached
thereto as Exhibit A with the Amended Schedule of Purchasers to reflect the
assignment and assumption effected hereby, (ii) to provide for the issuance and
sale of the Shares of Series C Preferred and Series C Warrants to Assignee as
provided in Section 2 above, (iii) to deem Assignee to be a "Purchaser"
thereunder, and (iv) as provided in Section 3(b) below. The Company undertakes
no obligation to update its representations and warranties contained in the
Subscription Agreement, which speak only as of the date on which they were
originally made (i.e., February 20, 1998).
(b) Section 7.3 of the Subscription Agreement is hereby amended to
read in its entirety as follows:
"Except as otherwise provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the
-2-
parties hereto, provided, however, that the obligations of a Purchaser to
purchase Shares and Series C Warrants shall not be assignable without the
prior written consent of the Company."
(c) Except as set forth in the first sentence of this Section 3, this
Agreement shall not amend or modify any provision of the Subscription
Agreement, which shall remain in full force and effect as amended hereby.
4. Miscellaneous.
-------------
(a) Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereunder shall be construed in accordance with and be governed by
the laws of the State of California.
(b) Entire Agreement. This Agreement and the Subscription Agreement
----------------
and the other documents delivered pursuant hereto and thereto constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
(c) Amendment. This Agreement may be modified or amended only by a
---------
written instrument duly executed by all of the parties hereto.
(d) Counterparts. This agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
(e) Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties and their respective successors and permitted
assigns.
-3-
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
this 24th day of April, 1998.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By: /s/ Xxxxxxx Xxxxx
---------------------------------------------
Name: Xxxxxxx Xxxxx
-------------------------------------------
Title: CFO
------------------------------------------
WARBURG, XXXXXX VENTURES, L.P.
By: Warburg, Xxxxxx & Co.,
its General Partner
By: /s/ Xxxxxx X. Xxxxx
------------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Xxxx Xxxxxxx
---------------------------------------------
Name: Xxxx Xxxxxxx
-------------------------------------------
Title: General Partner
------------------------------------------
XXXXXX XXXX
/s/ Xxxxxx Xxxx
------------------------------------------------
*** ASSIGNMENT AND ASSUMPTION AGREEMENT SIGNATURE PAGE ***
EXHIBIT A
---------
Amended Schedule of Purchasers
Number of Number of
Number of Shares of Series C
Common Stock Series C Preferred Aggregate
Name and Address Warrants Preferred Stock Warrants Purchase Price
------------------------------------ --------------- --------------- --------------- ---------------
Warburg, Xxxxxx Ventures, L.P. 451,773 1,527,501 1,253,318 $12,724,083.33
c/o X.X. Xxxxxxx, Xxxxxx & Co., LLC
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, XX 00000-0000
Crosspoint Venture Partners 1996. 112,943 381,875 313,329 $ 3,181,018.75
The Pioneer Hotel Building
0000 Xxxxxxxx Xxxx
Xxxxxxxx, XX 00000
Intel Corporation 35,284 120,048 98,500 $ 999,999.84
0000 Xxxxxxx Xxxxxxx Xxxxxxxxx
Mail Stop SC4-210
Xxxxx Xxxxx, XX 00000-0000
Attn: Treasurer
Xxxxxx Xxxx -- 12,005 9,853 $ 100,001.65
0 Xxxxxx Xxxx Xxxxx
Xxxxxx Xxxxxx, XX 00000
--------------- --------------- --------------- ---------------
600,000 2,041,429 1,675,000 $17,005,103.57
