EXHIBIT 99.1
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made and entered into as of August
26, 1999, by and between CyberGuard Corporation, a Florida corporation (the
"Company"), and Fernwood Partners II, LLC, a Delaware limited liability company
("Lender").
1. Loan and Use of Proceeds
Subject to and upon the terms and conditions herein set forth, the Lender
agrees to loan to the Company the aggregate principal amount of $3,699,484.38
(the "Loan"). The Company's obligation to pay the principal of, and interest on,
the Loan shall be evidenced by the Note (as defined below). The proceeds of the
Loan shall be used (i) to satisfy the existing indebtedness of the Company to
Fernwood Partners, LLC, which indebtedness is evidenced by that certain
Promissory Note previously executed by the Company in the original principal
amount of $1,125,000, (ii) for payment of Lender's expenses pursuant to Section
-------
17 hereof, and (iii) for general corporate purposes.
--
2. Promissory Note
The Company hereby covenants and agrees to issue a convertible promissory
note in the form of Exhibit A hereto to the Lender (the "Note") in the principal
---------
amount of the Loan. The Note will be secured by all of the Company's assets
pursuant to a Security Agreement in the form of Exhibit B hereto. The Note will
---------
only be subordinated in right of payment to the Senior Debt (as defined below)
of the Company.
The Note will mature on June 30, 2002. The Note will bear interest at the
rate of 11.5% per annum from the date of issuance. Interest will be calculated
on the basis of a 360-day year consisting of twelve 30-day months. Accrued
interest shall be payable quarterly on January 1, April 1, July 1 and October 1
of each year, commencing October 1, 1999, to the entity or persons in whose name
the Note is issued; except that interest accruing from the date of issuance of
the Note through July 1, 2000 shall be compounded quarterly on January 1, April
1, July 1 and October 1, commencing October 1, 1999, and added to the principal
amount of the Note. Any amount of principal or interest not paid when due
(whether at the stated due date, at maturity, upon acceleration, or otherwise)
shall thereafter bear interest until paid in full at the rate of 17.5% per
annum. The Note may be presented for transfer or exchange at the office of the
Company, which office is currently located at 0000 Xxxx Xxxxxxxxxx Xxxx., Xxxxx
000, Xx. Xxxxxxxxxx, Xxxxxxx 00000. No service charge will be made for transfer
or exchange of the Note.
3. Conversion Rights
The Lender will have the right ("Conversion Right"), at the Lender's
option, to convert all or any portion of the principal and accrued interest of
the Note into fully paid and
nonassessable shares of the Company's Common Stock ("Common Stock"). The number
of shares of Common Stock into which the Note may be converted ("Conversion
Shares") shall be determined by dividing the aggregate principal amount of the
Note, together with all accrued interest to the date of conversion, by the
conversion price in effect at the time of conversion (the "Conversion Price").
The Conversion Price shall be equal to One Dollar ($1.00), subject to adjustment
in accordance with the terms of the Note.
Upon conversion of the Note, the Lender will have and be entitled to
exercise the registration rights granted pursuant to Section 13 of this
----------
Agreement with respect to the shares of Common Stock issued upon conversion of
the Note.
4. Warrant Rights
The Company will grant the Lender a Common Stock Purchase Warrant (the
"Warrant") in the form of Exhibit C hereto that is exercisable into the number
---------
of shares of Common Stock equal to the aggregate dollar amount of the Loan
(rounded to the nearest dollar) (the "Exercise Shares"). The Warrant shall have
an exercise price of $2.00 per share (the "Exercise Price"). The number of
Exercise Shares and the Exercise Price shall be subject to adjustment in
accordance with the terms of the Warrant. The Warrant shall have a term of five
(5) years.
Upon exercise of the Warrant, the Lender will have and be entitled to
exercise the registration rights granted pursuant to Section 13 of this
----------
Agreement with respect to the shares of Common Stock issued upon exercise of the
Warrant.
5. Subordination
The Note is a secured obligation of the Company, in priority second only to
the existing indebtedness of the Company to Coast Business Credit, a division of
Southern Pacific Bank (the "Senior Debt"). The Note shall be subordinated in
right of payment to the Senior Debt. The Lender agrees to execute any
subordination agreement reasonably requested by any holder of the Senior Debt.
No payment may be made by the Company on account of the principal of and
interest on the Note, unless and until the principal of and interest of the
Senior Debt is either current or until such payment default has been cured or
waived or otherwise has ceased to exist.
Upon any distribution of assets of the Company or upon any dissolution,
winding up, liquidation or reorganization of the Company, whether voluntary or
involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or
upon assignment for the benefit of creditors or any marshaling of assets or
liabilities, (i) the holders of all Senior Debt will first be entitled to
receive payment in full (or have such payment duly provided for) before the
Lender is entitled to receive any payment on account of the principal of,
premium, if any, or interest on, the Note and (ii) any payment or distribution
of assets of the Company of any kind or character, whether in
2
cash, property or securities to which the Lender would be entitled (by setoff or
otherwise), except for the subordination provisions contained in this Agreement,
will be paid by the liquidating trustee or agent or other person making such a
payment or distribution directly to the lenders of Senior Debt or their
representative to the extent necessary to make payment in full of all such
Senior Debt remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company shall be received by the Lender at a time
when such payment or distribution is prohibited by the foregoing provisions,
such payment or distribution shall be held in trust for the holders of Senior
Debt, and shall be paid or delivered by the Lender, as the case may be, to the
holders of the Senior Debt remaining unpaid or unprovided for or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior Debt
may have been issued, ratably according to the aggregate amounts remaining
unpaid on account of the Senior Debt held or represented by each, for
application to the payment of all such Senior Debt remaining unpaid, to the
extent necessary to pay or to provide for the payment of all such Senior Debt in
full after giving effect to any concurrent payment or distribution to the
holders of the Senior Debt.
No provision contained in this Agreement or the Note will affect the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of and premium, if any, and interest on the Note as and when the
same shall become due and payable. The subordination provisions of this
Agreement and the Note will not prevent the occurrence of any default or event
of default under this Agreement or the Note or limit the rights of the Lender,
subject to the preceding paragraphs, to pursue any other rights or remedies with
respect to the Note.
6. Conversion at the Company's Option
At the option of the Company, the Note may be converted into shares of
Common Stock at the Conversion Price if (i) shares of the Common Stock close at
a price in excess of Four Dollars ($4.00) per share for ninety (90) consecutive
trading days, and (ii) the shares of Common Stock into which the Note is
converted are fully registered under the Securities Act of 1933, as amended (the
"Securities Act"), and freely transferrable.
7. Acceleration of the Note at the Option of the Lender Upon a Change of
Control
In the event that a Change of Control (as defined in the Note) has
occurred, the Lender will have the right, in its sole discretion, to declare the
entire principal amount and accrued interest of the Note immediately due and
payable.
3
8. Events of Default and Remedies
The occurrence of any of the following events shall constitute an "Event of
Default" under this Agreement, and the Company shall give the Lender immediate
notice thereof: (a) the failure of the Company to make any payment of principal
or interest under the Note when due, (b) the Company becomes subject to any
bankruptcy, insolvency, receivership or debtor relief proceedings and, in the
case of any such proceedings initiated against the Company, the same have not
been discharged within sixty (60) days after institution, (c) the Company makes
an assignment for the benefit of creditors, or admits in writing an inability to
pay its debts generally as they become due, (d) the Company fails to comply with
or perform any covenant, agreement or condition of this Agreement or any other
Loan Document, (e) any statement, representation or warranty in any of the Loan
Documents is false, misleading or erroneous in any material respect on the date
thereof, and such statement, representation or warranty is not made true and
correct (as of the time such corrective action is taken) within the applicable
grace period (if any) provided for in such Loan Document, (f) the occurrence of
any event or condition deemed to be a default under or as defined in any other
Loan Document, or (g) the Company breaches of defaults under any material
contract or obligation which has or may reasonably be expected to have a
material adverse effect on the business or operations of the Company, including,
with limitation, a default by the Company under the Senior Debt; provided,
however, the Lender acknowledges that as of the date hereof, the Company is in
default under the Senior Debt for failure to timely file the reports listed on
Exhibit D. For purposes of this Agreement, the term "Loan Documents" shall mean
---------
this Agreement and the other documents and agreements executed in connection
herewith (as the same may be further amended, supplemented, restated or
otherwise modified from time to time), including, without limitation, the Note,
the Warrant and the Security Agreement.
If an Event of Default occurs then all principal and accrued interest on
the Note will be immediately due and payable without any declaration or other
act on the part of the Lender. The Lender is authorized to rescind such
acceleration if all existing Events of Default, other than the nonpayment of the
principal of, and interest on, the Note that has become due solely by such
acceleration, has been cured or waived; provided, however, the Lender shall have
no obligation to rescind any such acceleration or waive any Event of Default.
9. Conditions Precedent to Obligations of Lender
The obligations of the Lender to make the Loan is subject to the
satisfaction of the following conditions precedent:
A. The Company shall have procured loans in the aggregate principal amount
of at least $250,000 from certain employees, officers or members of the
Company's Board of Directors, which loans shall be evidenced by convertible
promissory notes of the Company, the terms of which shall be identical to the
Note issued to the Lender hereunder. The employees, officers or members of the
Company's Board of Directors who make such loans shall be granted
4
warrants to purchase Common Stock of the company on the same terms as the
Warrant granted to the Lender hereunder.
B. Except as disclosed in Exhibit D hereof, the Company shall have filed
---------
all reports required to be filed pursuant to Sections 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
C. If required, the Company shall have obtained the written consent of
Coast Business Credit to the Company's use of a portion of the proceeds of the
Loan to satisfy the existing indebtedness of the Company to Fernwood Partners,
LLC.
10. Covenants of the Company
In order to induce the Lender to enter into this Agreement and to make the
Loan, the Company covenants and agrees as follows:
A. Payment and Performance. The Company will pay all amounts due under the
-----------------------
Note in accordance with the terms thereof and will observe, perform and comply
with every covenant, term and condition of this Agreement or any other Loan
Document. The Company will cause each of its subsidiaries to observe, perform
and comply with every such term, covenant and condition.
B. Books, Financial Statements and Reports. The Company will at all times
---------------------------------------
maintain materially accurate books of account and records and will furnish the
following statements and reports to Lender at the Company's expense:
(1) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year, consolidated financial statements of the
Company together with all Note thereto, prepared in reasonable detail in
accordance with generally accepted accounting principles ("GAAP"), together with
an unqualified opinion (except for qualification due to preexisting class action
matters), based on an audit using generally accepted auditing standards, by
Price Waterhouse Coopers, or other independent certified public accountants
selected by the Company and reasonably acceptable to the Lender.
(2) As soon as available, and in any event within forty-five (45)
days after the end of each fiscal quarter, the Company's consolidated and
consolidating balance sheet as of the end of such fiscal quarter and
consolidated and consolidating statements of the Company's earnings and cash
flows for the period from the beginning of the then current fiscal year to the
end of such fiscal quarter, all in reasonable detail and prepared in accordance
with GAAP, subject to changes resulting from normal year-end adjustments.
(3) As soon as available, and in any event within twenty-one (21)
days following the end of each calendar month, the Company's consolidated and
consolidating balance sheet as of the end of such month and consolidated and
consolidating statements of the Company's
5
earnings and cash flow for the period from the beginning of the then current
fiscal year to the end of such month, all in reasonable detail and prepared in
accordance with GAAP, subject to changes resulting from normal year-end
adjustments.
(4) As soon as available, and in any event within five (5) business
days following the end of each week, the Company's consolidated and
consolidating statement of the Company's cash flow for such week; provided,
however, that this obligation shall cease as soon as the Company is profitable
for two (2) consecutive quarters.
(5) Monthly receivable agings, aged by invoice date, and by due date,
within ten (10) days after the end of each month.
(6) Monthly accounts payable agings, aged by invoice date, and
outstanding or held check registers within ten (10) days after the end of each
month.
(7) All such other reports with respect to the Company (including
budgets, sales projections, operating plans and other financial documentation),
as the Lender shall from time to time reasonably specify subject to limitations
of applicable federal and state securities laws.
C. Senior Debt. The Company covenants and agrees that it will not borrow
-----------
from and be indebted to Coast Business Credit, a division of Southern Pacific
Bank, or any affiliate thereof, or any other lender (beside the Lender), which
collectively equals an amount which in the aggregate exceeds $2,500,000.
D. Other Information and Inspections. The Company will furnish to the
---------------------------------
Lender any information which the Lender may from time to time reasonably request
in writing concerning any covenant, provision or condition of this Agreement or
any other Loan Document, or any matter in connection with the Company's
businesses and operations. Upon reasonable notice, the Company will permit
representatives appointed by the Lender (including independent accountants,
auditors, agents, attorneys, appraisers and any other persons) to visit and
inspect during normal business hours the Company's property, including its books
of account, other books and records, and any facilities or other business
assets, and to make extra copies therefrom and photocopies and photographs
thereof, and to write down and record any information such representatives
obtain. The Lender agrees to maintain the confidentiality of all such
information disclosed to it and agrees and acknowledges that it will not
directly or indirectly trade in any of the Company's securities during any
period in which it has material information relating to the Company which is not
publicly available.
E. Notice of Material Events and Change of Address. The Company will
-----------------------------------------------
promptly notify the Lender in writing, stating that such notice is being given
pursuant to this Agreement, of:
6
(1) the occurrence of any material adverse change in the business or
operations of the Company;
(2) the occurrence of any Event of Default of which it has knowledge;
(3) the acceleration of the maturity of any indebtedness owed by the
Company or of any default by the Company under any material indenture, mortgage,
agreement, contract or other instrument to which it is a party of which it has
knowledge; and
(4) any filing of any suit or proceeding against the Company having a
claim or
potentially a claim of $100,000 or more.
F. Payment of Taxes, etc. The Company will (a) timely file all required
----------------------
tax returns; (b) timely pay all taxes, assessments, and other governmental
charges or levies imposed upon it or upon its income, profits or property unless
contested in good faith; and (c) maintain appropriate accruals and reserves for
all of the foregoing in accordance with GAAP.
G. Agreement to Deliver Security Documents. The Company agrees to deliver
---------------------------------------
and to further secure the Note whenever requested by the Lender, in its sole and
absolute discretion, with deeds of trust, mortgages, chattel mortgages, security
agreements, financing statements and other security documents in form and
substance reasonably satisfactory to the Lender for the purpose of granting,
confirming, and perfecting liens or security interests in any real or personal
property now owned or hereafter acquired by the Company.
H. Perfection and Protection of Security Interests and Liens. The Company
---------------------------------------------------------
will from time to time deliver to the Lender any financing statements,
continuation statements, extension agreements and other documents, properly
completed and executed (and acknowledged when required) by the Company in form
and substance reasonably satisfactory to the Lender.
I. Reporting Requirements. The Company will file in a timely manner the
----------------------
reports required to be filed by it under the Securities Act, the Exchange Act,
and the rules and regulations adopted by the Commission thereunder, and will
take such further action as the Lender may reasonably request, all to the extent
required from time to time to enable the Lender to sell within the limitation of
the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or (b) any similar rules or regulations
hereafter adopted by the Commission. Upon the reasonable request of the Lender,
the Company will deliver to the Lender a written statement as to filings made by
the Company with the Commission.
J. Reporting Under Section 13. The Company covenants and agrees that it
--------------------------
will provide to the Lender any information required for the preparation and
filing of a schedule by the Lender pursuant to Section 13 of the Exchange Act,
and that the Company will assume any and all costs incurred by the Lender as the
result of the preparation and filing of such schedule.
7
K. Maintenance of Insurance. The Company shall (a) maintain with
------------------------
financially sound and reputable insurance companies insurance on itself and its
properties in at least such amounts and against at least such risks as are
customarily insured against in the same general area by companies engaged in the
same or a similar business, which insurance shall in any event not provide for
materially less coverage than the insurance in effect on the date hereof, (b)
maintain the Lender as a named additional insured and loss payee, subordinated
to the Senior Debt, in respect of such insurance, and (c) furnish to the Lender
from time to time, upon written request, the policies under which such insurance
is issued, certificates of insurance and such other information relating to such
insurance as the Lender may request.
L. Liens. The Company shall not create, incur, assume or suffer to exist,
-----
directly or indirectly, any lien, encumbrance, pledge, assignment, preference,
priority or other security interest of any kind whatsoever (collectively, a
"Lien") on any of the Collateral (as defined in the Security Agreement), other
than:
(1) Liens in favor of (a) the holder of the Senior Debt existing on
the date hereof, (b) the Lender pursuant to the terms hereof and the other Loan
Documents, and (c) the persons or entities who have loaned money to the Company
on the date hereof, are a party to the Security Agreement and are listed on
Exhibit E attached hereto;
---------
(2) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings diligently conducted and with respect to which
adequate reserves are being maintained in accordance with GAAP;
(3) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other Liens imposed by law created in the ordinary
course of business for amounts not yet due or which are being contested in good
faith by appropriate proceedings diligently conducted and with respect to which
adequate bonds have been posted; and
(4) Liens created pursuant to capitalized leases and to secure other
purchase money indebtedness, provided that such Liens are only in respect of the
--------
property or assets subject to, and secure only, the respective capitalized lease
or other purchase money indebtedness.
M. Advances, Investments and Loans. The Company shall not lend money or
-------------------------------
credit or make advances to any Person, or directly or indirectly purchase or
acquire any stock, obligations or securities of, or any other interest in, or
make any capital contribution to any Person, except that the following shall be
permitted:
(1) accounts receivable owned by the Company if created in the
ordinary course of the business of the Company and payable or dischargeable in
accordance with customary trade terms; and
8
(2) loans and advances by the Company to its employees in the ordinary
course of its business not exceeding $25,000 in the aggregate at any one time
outstanding.
N. Dividends. Except for any liability arising from the class action
---------
litigation described on Exhibit H hereof, the Company shall not declare or pay
---------
any dividends (other than dividends payable solely in Common Stock) or return
any capital to its stockholders or authorize or make any other distribution,
payment or delivery of property or cash to its stockholders as such, or redeem,
retire, purchase or otherwise acquire, directly or indirectly, any shares of any
class of its capital stock now or hereafter outstanding (or any options or
warrants issued with respect to its capital stock), or set aside any funds for
any of the foregoing purposes.
O. Financial Covenants. So long as any principal of or interest on any of
-------------------
the Note shall remain unpaid, the Company will:
(1) Maintain a ratio of Consolidated Current Assets to Consolidated
Current Liabilities (excluding the Note, the notes issued to the persons or
entities listed on Exhibit E hereto and the Senior Debt) at all times of not
---------
less than 1:1; and
(2) Maintain the Net Worth of the Company and its subsidiaries, on a
consolidated basis, at all times in an amount of at least One Dollar ($1.00).
The term "Consolidated Current Assets" shall mean all assets that as of the
date of determination thereof and in accordance with GAAP, consistently applied,
should be classified as current assets on a consolidated balance sheet of the
Company and its subsidiaries. The term "Consolidated Current Liabilities' shall
mean all liabilities that as of the date of determination thereof and in
accordance with GAAP, consistently applied, should be classified as current
liabilities on a consolidated balance sheet of the Company and its subsidiaries.
The term "Net Worth" shall mean the difference between the total assets
(including intangibles) and total liabilities (excluding subordinated
indebtedness, if any, and Preferred Stock and shareholders' equity) as shown on
a balance sheet of the Company and its subsidiaries on a consolidated basis,
prepared in accordance with GAAP, consistently applied.
P. Litigation Cooperation. Should any third party suit or proceeding be
----------------------
initiated by or against the Lender with respect to any Collateral (as defined in
the Security Agreement) or relating to the Company, the Company shall, without
expense to the Lender, make available to the Lender the Company's officers,
employees and agents and the Company's books and records, to the extent that the
Lender may deem them reasonably necessary in order to prosecute or defend any
such suit or proceeding.
Q. Rights and Warrants. Except for the warrants issued (i) to the Lender,
-------------------
(ii) to the persons or entities listed on Exhibit E in connection with this
---------
Agreement, and (iii) in connection with the class action litigation described on
Exhibit H hereof, during any fiscal year of the Company, the Company shall not
---------
issue any rights or warrants which collectively entitle the
9
holders thereof to subscribe for or purchase shares of any class of the
Company's capital stock in excess of 500,000 shares of the Company's capital
stock, plus the unexercised portion of the outstanding rights and warrants that
expire, are forfeited or otherwise terminate during such fiscal year. Further,
the Company shall not amend, alter or otherwise modify any agreement or option
entitling the holder thereof to subscribe for or purchase shares of any class of
the Company's capital stock.
R. SEC Filings. On or before August 31, 1999, the Company will file with
-----------
the Commission its Form 10-K for its fiscal year ended June 30, 1999. On or
before September 15, 1999, the Company will file with the Commission its Form
10-Qs for the quarters ended September 30, 1998, December 31, 1998, and March
31, 1999.
S. Senior Debt Restructuring. The Company shall use its best efforts to
-------------------------
have the Senior Debt restructured on the terms set forth on Exhibit F hereto on
---------
or before September 7, 1999. In the event the Senior Debt is not restructured
on such terms by such date, Lender may, in its sole discretion, advance to the
Company funds necessary to satisfy the Senior Debt (the amount required to
satisfy the Senior Debt, including all fees and expenses related thereto, if
any, is referred to herein as the "Payoff Amount"; provided, however, the Payoff
Amount shall not include the Secured Term Loan No. 1 in the principal amount of
$650,000 which amount will be repaid to Coast Business Credit ("Coast") through
the use of the cash balance that is held by Coast as security for the Secured
Term Loan No. 1). The Payoff Amount shall be paid directly to the holder of the
Senior Debt, on behalf of the Company, and shall be deemed an additional loan to
the Company hereunder. Upon satisfaction of the Senior Debt, the Company shall
terminate the Loan Agreement with the holder of the Senior Debt and take
whatever action is necessary to have the security interest granted to the holder
of the Senior Debt released. Upon satisfaction of the Senior Debt, the Company
shall execute and deliver to the Lender (i) a convertible promissory note, the
terms and conditions of which shall be identical to the Note, in the principal
amount of the Payoff Amount, and (ii) a Common Stock Purchase Warrant, the terms
and conditions of which shall be identical to the Warrant, exercisable into the
number of shares of Common Stock equal to the aggregate dollar amount of the
Payoff Amount (rounded to the nearest dollar). Upon satisfaction of the Senior
Debt, Lender shall have a first-priority perfected security interest in the
Collateral (as defined in the Security Agreement). Upon satisfaction of the
Senior Debt, Sections 5 and 10.C of this Agreement shall be deleted in their
---------- ----
entirety.
11. Representations and Warranties of the Company
The Company makes the following representations and warranties:
A. Corporate Status. The Company (i) is a duly organized and validly
----------------
existing corporation in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the corporate power and authority to own its property
and assets and to transact the business in which it is engaged or presently
proposes to engage, and (iii) is duly qualified and is authorized to do
10
business and is in good standing as a foreign corporation in every foreign
jurisdiction in which it owns or leases real property or in which the nature of
its business requires it to be so qualified.
B. Authority. The executive officers executing the Loan Documents have
---------
the full authority of the Company and its Board of Directors to accept and bind
the Company to the terms and conditions of this Agreement, the other Loan
Documents and all exhibits attached hereto and thereto.
C. Capitalization. The authorized capital stock of the Company consists
--------------
of 20,000,000 shares of Common Stock, having a par value of $.01 per share and
5,000,000 shares of Preferred Stock, having a par value of $.01 per share (the
"Preferred Stock").
D. Options and Rights. Except as set forth on Exhibit G hereto, no person
------------------ ---------
has any agreement or option or any right or privilege (whether by or at law,
preemptive or contractual) capable of becoming an agreement, including
convertible securities, warrants or convertible obligations of any nature, for
the purchase, subscription, allotment or issuance of any unissued shares of
Common Stock or Preferred Stock.
E. Common Stock. As of the date hereof, there were 9,089,101 shares of
------------
Common Stock issued and outstanding and 13,661,968 shares of Common Stock
reserved for issuance upon the exercise of options or warrants or upon the
conversion of convertible securities. All of such outstanding shares of Common
Stock are, and the shares of Common Stock issuable upon conversion of the Note
and/or exercise of the Warrant will be upon issuance, fully paid and
nonassessable. Each share of Common Stock has an equal and ratable right to
receive dividends when, as and if declared by the Board of Directors of the
Company out of assets legally available therefor. The Company is subject to
certain restrictions on the payment of dividends on, and the repurchase or
redemption of, the Common Stock under the provisions of the Senior Debt. In the
event of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share equally and ratably in the assets available
for distribution after payment of all liabilities. The holders of Common Stock
have no preemptive, subscription, conversion or redemption rights, and are not
subject to other calls or assessments by the Company. There are no sinking fund
provisions applicable to the Common Stock. Each share of Common Stock is
entitled to one vote in the election of directors and on all other matters
submitted to a vote of stockholders. Holders of Common Stock have no right to
cumulate their votes in the election of directors. As of the date hereof, there
are no shares of Preferred Stock issued or outstanding.
F. No Violation. Neither the execution, delivery or performance by the
------------
Company of this Agreement or the other Loan Documents, nor compliance by it with
the terms and provisions hereof and thereof, nor the consummation of the
transactions contemplated herein and therein, (i) will contravene any applicable
provisions of any law, statute, rule, regulation, order, writ, injunction or
decree of any court or governmental instrumentality, or (ii) will conflict or be
inconsistent with or result in any breach of, any of the terms, covenants,
conditions or provisions of, or constitute a default under, or result in the
creation or imposition of (or the obligation to
11
create or impose) any lien, security interest or encumbrance upon any of the
property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, agreement or other instrument to which the Company is a
party or by which it or any of its property or assets is bound or to which it
may be subject, or (iii) will violate any provisions of the Certificate of
Incorporation or By-Laws of the Company.
G. Company Filings. Except as disclosed on Exhibit D hereof, the Company
--------------- ---------
represents and warrants that it has filed all reports, registrations and
statements, together with any amendments required to be made with respect
thereto, copies of which have been made available to the Lender, that were
required to be filed with (a) the Commission, and (b) any other federal, state
or local governmental or regulatory authority. All such reports, registrations
and filings are collectively referred to as the "Company Filings". As amended,
restated or, with respect to the financial statements contained therein,
corrected in a subsequent filing, each of the Company Filings (a) was true and
complete in all material respects, and (b) complied in all material respects
with all of the statutes, rules and regulations enforced or promulgated by the
governmental or regulatory authority with which it was filed (or was amended so
as to be so promptly following discovery of any such noncompliance) and none
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
not misleading.
H. Transfer Agent and Registration. The Company represents and warrants
-------------------------------
that the Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, and further covenants and agrees to notify the Lender
in writing within ten (10) days of any change of the Transfer Agent or
Registrar.
I. Financial Statements; Financial Condition; Etc. The financial
----------------------------------------------
statements contained in the Company Filings, as amended, restated or corrected
in a subsequent filing, were prepared in accordance with GAAP consistently
applied and fairly present the financial condition and the results of operations
of the entities covered thereby on the dates and for the periods covered
thereby, except as disclosed in the Note thereto and, with respect to interim
financial statements, subject to normally recurring year-end adjustments. The
Company has no material liability (contingent or otherwise) not reflected in
such financial statements or in the Note thereto.
J. Litigation. Except as set forth on Exhibit H hereof, there are no
---------- ---------
actions, suits or proceedings pending or threatened (i) with respect to this
Agreement or the other Loan Documents or any of the transactions contemplated
herein or therein, or (ii) that could, individually or in the aggregate, result
in a material adverse effect upon the business, operations, properties, assets,
prospects or condition (financial or otherwise) of the Company, or the ability
of the Company to perform, or of the Lender to enforce, any of the Loan
Documents.
K. Title to Property. The Company is and shall be the owner of the
-----------------
Collateral (as defined in the Security Agreement), with good and valid title
thereto, free and clear of all
12
encumbrances, liens or security interests other than the security interest
granted to Coast Business Credit and the security interest granted to the Lender
pursuant to the Security Agreement.
L. Compliance with Securities Laws. The Company represents and warrants
-------------------------------
that the concurrent issuance of convertible promissory notes and warrants to the
Company's employees, officers and members of the Company's Board of Directors
who have made loans to the Company does not violate the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, or any applicable
state securities laws or regulations (collectively, the "Securities Laws"),
except where such violation would not have a material adverse effect on the
Company. For purposes of this Section 11.L, the phrase "material adverse effect"
shall mean any payments made by the Company (including recission payments) to
the persons or entities listed on Exhibit E hereof resulting from a violation of
---------
the Securities Laws, which payments are equal to or greater than $20,000 to any
one such person or entity, or $75,000 in the aggregate.
12. Representations and Warranties of the Lender
The Lender makes the following representations and warranties:
A. Investment Purpose. The Lender is acquiring the Note and the Warrant
------------------
and the shares of Common Stock issuable upon conversion or exercise thereof, for
its own account, for investment only and not with a view towards the public sale
or distribution thereof, except pursuant to sales registered or exempted from
registration under the Securities Act.
B. Accredited Investor Status. The Lender is an "accredited investor" as
--------------------------
that term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act.
C. Reliance on Exemptions. The Lender understands that the Note and the
----------------------
Warrant are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of the United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Lender's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Lender set forth herein in order to
determine the availability, of such exemptions.
D. Information. The Lender and its advisors, if any, have been furnished
-----------
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Note and Warrant
which have been requested by the Lender or its advisors. The Lender and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what the Lender believe to be satisfactory answers to
any such inquiries. The Lender understands that its investment in the Note and
Warrant involves a significant degree of risk. The Lender further acknowledges
receipt of the "Risk Factors" supplement attached hereto.
13
E. Governmental Review. The Lender understands that no United States
-------------------
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Note and the
Warrant.
F. Transfer or Resale. The Lender understands the limitations on resale or
------------------
transfer of the Note and the Warrant incorporated herein and those additional
restrictions applicable pursuant to securities laws.
G. Legends. The Lender understands that the Note and Warrant and, until
-------
such time as the shares of Common Stock issuable upon the conversion or exercise
of the Note and/or Warrant have been registered under the Securities Act as
contemplated herein, such shares may bear a restrictive legend in substantially
the following form (and a stop-transfer order may be placed against transfer of
the certificates for such securities):
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in the
absence of an effective registration statement for the securities under
said Act, or an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required under said Act
or unless s old pursuant to Rule 144 under said Act."
13. Registration Rights
A. Form S-3. Notwithstanding any provisions contained in this Agreement or
--------
any other document to the contrary, the Company shall cause a registration
statement under Form S-3 to be filed with the Securities and Exchange Commission
("Commission") permitting the resale of the shares issuable upon conversion of
the Note and/or the exercise of the Warrant (collectively the "Registrable
Securities"). The Lender agrees and acknowledges that the Company has advised
the Lender that it is presently not eligible to utilize Form S-3 because, among
other reasons, of its failure to timely file its Form 10-K for its fiscal year
ended on June 30, 1998, and its Form 10-Qs for its fiscal year ended on June 30,
1999. The Lender further acknowledges that the Company will not be eligible to
use a Form S-3 for at least one year after it has filed such Form 10-K, provided
that it otherwise meets the "registration eligibility" requirements set forth in
the general instructions to Form S-3. The parties agree that the Company shall
not be required to register any Registrable Securities except (i) pursuant to a
Form S-3, as and when available to the Company, (ii) pursuant to the demand
registration granted below, and (iii) pursuant to the piggyback registration
rights granted below. Additionally, the Company acknowledges that Lender may at
its option convert the Note and/or exercise the Warrant into non-registered
shares of the Company.
B. Demand Registration. To the extent not otherwise registered, after one
-------------------
year from the date hereof the Lender shall have the right to demand from the
Company, at its expense, a
14
registration of shares issuable upon conversion of the Note and/or exercise of
the Warrant pursuant to a Form S-1. If the Company shall receive a written
request from the Lender that the Company file a registration statement under the
Securities Act, or a similar document pursuant to any other statute then in
effect corresponding to the Securities Act, covering the registration of at
least 500,000 Registrable Shares (subject to adjustment for stock splits, stock
dividends, recapitalizations, and other reorganizations), then the Company shall
within five (5) days after the Company receives such written request to file a
registration statement use its best efforts to cause to be registered under the
Securities Act the Registrable Shares which the Company has been so requested to
register. Any request for registration under this Section 13.B must be for a
------------
firmly or best efforts underwritten public offering to be managed by an
underwriter or underwriters of recognized national standing selected by the
Lender. A registration requested pursuant to this Section 13.B will not be
------------
deemed to have been effected unless it has become effective.
C. Piggyback Registration. Subject to the limitations set forth in this
----------------------
Section 13.C, if the Company shall propose to issue and register shares of its
------------
equity securities on its own behalf or to register equity securities on behalf
of any holder of its equity securities under the Securities Act, the Company
shall give written notice as promptly as possible of such registration to each
of the holders of the Note and the Warrant (which notice shall include the
anticipated filing date of the Registration Statement and the number of its
equity securities proposed to be included in the Registration Statement), and
will use its best efforts to include in the offering such amount of the
Registrable Securities as any such holder (a "Participating Holder") shall
request to be included by written notice to the Company received within fifteen
(15) days after receipt of the Company's notice, upon the same terms (including
the method of distribution) as the equity securities being sold by the Company
or any such holder pursuant to any such offering (a "Piggyback Registration").
(i) Requirements of Request. Each request delivered to the Company
-----------------------
pursuant to this Section 13.C shall: (i) specify the amount of Registrable
------------
Securities intended to be offered and sold by the Participating Holder; and (ii)
contain the undertaking of the Participating Holder to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
commission and state securities and "blue sky" laws and to obtain acceleration
of the effective date of the Registration Statement.
(ii) Limitations on Incidental Registrations. The obligations of the
---------------------------------------
Company to cause Registrable Securities to be registered pursuant to this
Section 13.C are subject to each of the following limitations, conditions and
------------
qualifications:
(a) The Company shall not be required to give notice or include
Registrable Securities in any registration if the proposed registration is
primarily: (A) a registration of a stock option, thrift, employee benefit or
compensation plan or of securities issued or issuable pursuant to any such plan;
(B) a registration of securities proposed to be issued in connection with a
dividend reinvestment plan or stock purchase plan; (C) a registration of
15
securities proposed to be issued in exchange for securities or assets of, or in
connection with a merger or consolidation with, another corporation or other
entity; (D) a registration of securities to be offered by the Company to its
then existing security holders; or (E) a registration of securities which is a
combination of any of the above.
(b) If the Company is advised by the managing underwriter or its
investment banking firm if the offering is not underwritten, that the inclusion
of Registrable Securities may, in the opinion of such underwriter or investment
banking firm, as the case may be, materially adversely affect the successful
marketing of the securities proposed to be offered by the Company, the number of
shares of Registrable Securities to be included in the offering shall be reduced
or eliminated to the extent necessary as shall be reasonably determined by such
underwriter or investment banker, as the case may be, in good faith; provided
that as to the Participating Holders, such reduction shall be pro rata with
respect to all securities to be sold by persons other than the Company; and,
provided, further, that in such event, the Participating Holders shall have the
right to withdraw their requests to participate in the offering.
(c) The Company may, in its sole discretion and without the
consent of or prior notice to any Participating Holder, withdraw such
registration statement and abandon the proposed offering in which the
Participating Holder had requested to participate at any time.
D. Prohibited Sales of Securities. Notwithstanding the foregoing, the
------------------------------
Company shall have the right to prohibit the sale of Registrable Securities
pursuant to any Registration Statement filed pursuant to this Section 13, upon
----------
notice to the applicable holder (i) if in the opinion of counsel for the
Company, the Company would thereby be required to disclose information not
otherwise then required by law to be publicly disclosed, provided that the
Company shall use its best efforts to minimize the period of time in which it
shall prohibit the sale of any shares of Registrable Securities pursuant to this
clause (i), (ii) during the period starting with the date 10 days prior to the
Company's estimate of the date of filing of, and ending on a date 90 days after
the effective date of, a Company initiated registration in which the person
requesting registration is entitled to participate in accordance with the
provisions of this Section 13 hereof, or such longer post-effective periods as
----------
may be reasonably required by the underwriter or underwriters if such offering
is underwritten, or (iii) upon the happening of any event, as a result of which
the Prospectus under the Registration Statement includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing (in which case, the Company shall promptly
provide the person requesting registration with revised or supplemental
prospectuses and such person shall promptly take action to cease making any
offers of the Registrable Securities until receipt and distribution of such
revised or supplemental prospectuses).
14. Indemnification
The Company shall pay, indemnify, defend, and hold the Lender and its
shareholders, officers, directors, employees, counsel, agents and attorneys-in-
fact (each, an "Indemnified
16
Person") harmless (to the fullest extent permitted by law) from and against any
and all claims, demands, suits, actions, investigations, proceedings, and
damages, and all attorneys fees and disbursements and other costs and expenses
actually incurred in connection therewith (as and when they are incurred and
irrespective of whether suit is brought), at any time asserted against, imposed
upon, or incurred by any of them in connection with or as a result of or related
to the execution, delivery, enforcement, performance, and administration of this
Agreement and any other Loan Documents or the transactions contemplated herein,
and with respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the Loan
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The
Company shall have no obligation to any Indemnified Person hereunder with
respect to any Indemnified Liability that has resulted from the gross negligence
or willful misconduct of such Indemnified Person. This provision shall survive
the termination of this Agreement and the repayment of the Note.
15. Governing Law
This Agreement shall be governed by the laws of the State of Connecticut,
without regard to conflict of law principles.
16. Notice
Any notice or communication required to be given hereunder shall be deemed
effectively given when personally delivered, when received by receipted
overnight delivery, or five (5) days after being deposited in the U.S. mail,
with postage prepaid thereon, certified registered mail, return receipt
requested, addressed as follows:
To the Lender: Fernwood Partners II, LLC
000 Xxxxx Xxxxxxxx Xxxxx, Xxxxx 000
Xxxxxxxx, Xxxxxxxxxxx 00000
Attn: Xxxxxxx X. Xxxxx
To Company: CyberGuard Corporation
0000 X. Xxxxxxxxxx Xxxx., Xxxxx 000
Xxxx Xxxxxxxxxx, Xxxxxxx 00000
17. Expense Reimbursement
On the date the Loan is funded, the Company agrees to pay all of Lender's
legal expenses and out-of-pocket expenses related to the proposed transaction
with the proceeds of the Loan, up to a maximum aggregate amount of $30,000.
Subsequent to the date the Loan is funded, the Company agrees to pay on demand
all reasonable expenses of the Lender (including the reasonable fees and out-of-
pocket expenses of counsel to the Lender) in connection with the negotiation,
17
preparation, execution and delivery of any amendments, waivers, consents,
supplements or other modifications to this Agreement or any other Loan Document,
as well as in connection with the enforcement of the obligations represented by
this Agreement or any other Loan Document.
18. Partial Invalidity
If any provision of this Agreement or the application thereof to any party
or circumstances is held to be invalid or unenforceable, the remainder of this
Agreement and the application of any such provision to other parties or
circumstances shall not be affected thereby, the provisions of this Agreement
being severable in any such instance. No invalid provision hereof shall affect
or impair any other provision of this Agreement.
19. Amendments
Any amendment or modification to this Agreement shall not be effective
unless signed in writing by the parties hereto.
20. Headings; Construction
The headings of the sections of this Agreement are inserted for convenience
only and shall not be deemed to constitute a part hereof, words used herein of
any gender shall be construed to include any other gender where appropriate, and
words used herein which are either singular or plural shall be construed to
include the other where appropriate.
21. Successors and Assigns
All of the covenants, stipulations, promises, and agreements of this
Agreement shall bind the parties' successors and assigns, whether so expressed
or not; provided, however, that the Company may not, without the prior consent
of the Lender, assign any rights, duties, or obligations under this Agreement.
22. No Oral Agreements
This Agreement and the Loan Documents represent the final agreement between
the parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements of the parties. There are no unwritten oral
agreements between the parties.
23. Public Announcements
The Company shall not release, publish, or otherwise make available to the
public in any manner whatsoever any information or announcement regarding the
transactions herein contemplated without the prior written consent of Lenders,
except for information, press releases and filings required in connection with
securities and other laws.
18
24. Waiver of Trial by Jury
The Parties hereby irrevocably waive any and all rights they may have to
demand that any action, proceeding or counterclaim arising out of or in any way
related to this Agreement be tried by jury. This waiver extends to any and all
rights to demand a trial by jury arising from any source including, but not
limited to, the Constitution of the United States or any state therein, common
law or any applicable statute or regulations. The parties acknowledge that they
are knowingly and voluntarily waiving their right to demand trial by jury.
25. Survival
All representations and warranties made under this Agreement and all
statements, certifications and other information provided in or pursuant to this
Agreement or any other Loan Document shall be deemed to be made, and shall be
true and correct, as of the date hereof and shall survive, and not be waived by,
the execution hereof by the Lender or any investigation or inquiry of the
Lender.
26. Counterparts
This Agreement may be executed in two or more counterparts, each and all of
which shall be deemed an original and all of which together shall constitute but
one and the same instrument.
SIGNATURE PAGE FOLLOWS
19
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this
26th day of August, 1999.
COMPANY:
CyberGuard Corporation
By: /s/ Xxxxx X. Xxxxxxx
--------------------------------------------
Its: CEO
-------------------------------------------
LENDER:
Fernwood Partners II, LLC
By: /s/ Xxxxxxx X. Xxxxx
--------------------------------------------
Its: Member
-------------------------------------------
20
