ESOFT, INC. STOCK PURCHASE AND
INVESTOR RIGHTS AGREEMENT
ESOFT, INC.
STOCK PURCHASE AND INVESTOR RIGHTS AGREEMENT
This Stock Purchase and Investor Rights Agreement (this
"Agreement") is made and entered into on November 12, 1999, by
and between eSoft, Inc., a Delaware corporation (the "Company"),
and Intel Corporation, a Delaware corporation (the "Investor").
RECITALS
WHEREAS, the Company desires to sell to the Investor, and
the Investor desires to purchase from the Company, shares of
Common Stock, par value $.01 per share, of the Company (the
"Common Stock"), on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals,
the mutual promises hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. AGREEMENT TO PURCHASE AND SELL STOCK.
(a) Authorization. The Company's Board of Directors (the
"Board") will, prior to the Closing, authorize the issuance,
pursuant to the terms and conditions of this Agreement, of shares
of Common Stock in an amount equal to the number of Purchased
Shares (as defined in Section 1(b)).
(b) Agreement to Purchase and Sell Securities. The Company
hereby agrees to issue to the Investor at the Closing (as defined
below), and the Investor hereby agrees to acquire from the
Company at the Closing, the number of shares of Common Stock
(collectively, the "Purchased Shares") equal to Two Million Nine
Hundred Ninety-Nine Thousand Nine Hundred Ninety-Seven Dollars
($2,999,997) (the "Purchase Price") divided by the Per Share
Purchase Price (as defined below), rounded up to the nearest
whole share. As used in this Agreement, "Per Share Purchase
Price" equals $4.50.
(c) Use of Proceeds. The Company intends to apply the net
proceeds from the sale of the Purchased Shares for general
working capital purposes.
2. CLOSING. The purchase and sale of the Purchased Shares
shall take place at the offices of Gibson, Dunn & Crutcher LLP,
1530 Page Mill Road, Palo Alto, California, at 10:00 a.m.
California time, on the date hereof (which time and place are
referred to in this Agreement as the "Closing"). At the Closing,
the Company will deliver to the Investor certificates
representing the Purchased Shares against delivery to the Company
by the Investor of the Purchase Price in cash paid by wire
transfer of same-day funds to the Company. Closing documents may
be delivered by facsimile with original signature pages sent by
overnight courier. The date of the this Agreement sometimes is
referred to herein as the Closing Date.
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3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Investor that the
statements in this Section 3 are true and correct, except as set
forth in the Disclosure Schedule (as defined in Section 7(a)):
(a) Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all
corporate power and authority required to (a) own or lease its
properties and assets and carry on its business as presently
conducted, and (b) enter into this Agreement and the other
agreements, instruments and documents contemplated hereby, and to
consummate the transactions contemplated hereby and thereby.
Each of the Company's subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all corporate power
and authority required to own or lease its properties and assets
and carry on its business as presently conducted. Each of the
Company and its subsidiaries is qualified to do business and is
in good standing in each jurisdiction in which the failure to so
qualify or be in good standing, either individually or in the
aggregate, would have a Material Adverse Effect on the Company.
As used in this Agreement, "Material Adverse Effect" means a
material adverse effect on, or a material adverse change in, or a
group of such effects on or changes in, the business, operations,
financial condition, results of operations, prospects, assets or
liabilities of the applicable party and its subsidiaries, taken
as a whole.
(b) Capitalization. The capitalization of the Company,
without giving effect to the transactions contemplated by this
Agreement, is as follows. The authorized capital stock of the
Company consists only of 50,000,000 shares of Common Stock and
5,000,000 shares of preferred stock, $.01 par value ("Preferred
Stock"), of which 10,957,980 shares of Common Stock and no shares
of Preferred Stock were issued and outstanding as of
September 30, 1999. All such shares of Common Stock have been
duly authorized, and all such issued and outstanding shares of
Common Stock have been validly issued, are fully paid and
nonassessable and are free and clear of all liens, claims and
encumbrances, other than any liens, claims or encumbrances
created by or imposed upon the holders thereof. As of
September 30, 1999, the Company had also reserved: (i) 3,013,071
shares of Common Stock for issuance upon exercise of outstanding
options granted to officers, directors, employees, independent
contractors or affiliates of the Company or its subsidiaries
under the Company's equity incentive plans; (ii) 1,920,068 shares
of Common Stock issuable upon exercise of the Company's
outstanding warrants (the "Warrants"); and (iii) 1,277,955 shares
of Common Stock issuable upon conversion of the Company's
outstanding Convertible Debentures due June 10, 2002 (the
"Debentures"). As of September 30, 1999, (x) of the 3,729,294
shares of Common Stock reserved for issuance upon exercise of
options, 3,013,071 shares remained subject to outstanding options
and have a weighted average exercise price of approximately
$2.45, and 716,223 shares were reserved for future grant; and
(y) of the 1,920,068 and 1,277,955 shares of Common Stock
initially reserved for issuance upon exercise and conversion of
the Warrants and Debentures, respectively, none of such shares
has been issued. All shares of Common Stock subject to issuance
as aforesaid, upon issuance on the terms and conditions specified
in the instruments pursuant to which they are issuable, will be
duly authorized, validly issued, fully paid and nonassessable.
There are no other equity securities, options, warrants, calls,
rights, commitments or agreements of any character to which the
Company is a party or by which it is bound obligating the Company
to
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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 or enter into any such equity security, option,
warrant, call, right, commitment or agreement.
(c) Due Authorization. All corporate actions on the part
of the Company, its officers, directors and stockholders
necessary for the authorization, execution, delivery of, and the
performance of all obligations of the Company under, this
Agreement, and the authorization, issuance, reservation for
issuance and delivery of all of the Purchased Shares being sold
under this Agreement, have been taken, and this Agreement
constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its
terms, except (i) as may be limited by (A) applicable bankruptcy,
insolvency, reorganization or others laws of general application
relating to or affecting the enforcement of creditors' rights
generally and (B) the effect of rules of law governing the
availability of equitable remedies and (ii) as rights to
indemnity or contribution may be limited under federal or state
securities laws or by principles of public policy thereunder.
(d) Valid Issuance of Stock.
(i) Valid Issuance. The shares of Common Stock to be
issued pursuant to this Agreement are duly authorized and, upon
payment of the Purchase Price by the Investor in accordance with
this Agreement, will be validly issued, fully paid and non-
assessable.
(ii) Compliance with Securities Laws. Assuming the
correctness of the representations made by the Investor in
Section 4, the Purchased Shares will be issued to the Investor in
compliance with applicable exemptions from (A) the registration
and prospectus delivery requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and (B) the
registration and qualification requirements of all applicable
securities laws of the states of the United States.
(e) Governmental Consents. No consent, approval, order or
authorization of, or registration qualification, designation,
declaration or filing with, or notice to, any federal, state or
local governmental authority on the part of the Company or any of
its subsidiaries is required in connection with the issuance of
the Purchased Shares to the Investor, or the consummation of the
other transactions contemplated by this Agreement, except for
(i) the listing of the Purchased Shares on Nasdaq, (ii) the
filing of a Form D with the Securities and Exchange Commission
(the "SEC"), and (iii) the filing of a Notice of Transaction and
a Form U-2 with the California Department of Corporations.
(f) Non-Contravention. The execution, delivery and
performance of this Agreement by the Company, and the
consummation by the Company of the transactions contemplated
hereby (including the issuance of the Purchased Shares), do not
(i) contravene or conflict with the Company's Certificate of
Incorporation or Bylaws, in each case as amended; (ii) constitute
a violation of any provision of any federal, state, local or
foreign law binding upon or applicable to the Company or any of
its subsidiaries; or (iii) constitute a default or require any
consent under, give rise to any right of termination,
cancellation or acceleration of, or to a loss of any benefit to
which the Company or any of its subsidiaries is entitled under,
or result in the
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creation or imposition of any lien, claim or encumbrance on any
assets of the Company or any of its subsidiaries under, any
contract to which the Company or such subsidiary is a party or
any permit, license or similar right relating to the Company or
such subsidiary or by which the Company or such subsidiary may be
bound or affected.
(g) Litigation. There is no action, suit, proceeding,
claim, arbitration or investigation (each an "Action") pending
or, to the best of the Company's knowledge, threatened:
(i) against the Company or any of its subsidiaries, or any of
their respective activities, properties or assets, or any of
their respective officers, directors or employees of the Company
or any of its subsidiaries in connection with such officer's,
director's or employee's relationship with, or actions taken on
behalf of, the Company or such subsidiary, or (ii) that seeks to
prevent, enjoin, alter or delay the transactions contemplated by
this Agreement (including the issuance of the Purchased Shares).
Neither the Company nor any of its subsidiaries is a party to or
subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or
instrumentality. No Action by the Company or any of its
subsidiaries is currently pending nor does the Company or any of
its subsidiaries intend to initiate any Action that is reasonably
likely to be material to the Company and its subsidiaries, taken
as a whole.
(h) Compliance with Law and Charter Documents. The Company
is not in violation or default of any provisions of its
Certificate of Incorporation or Bylaws, in each case as amended.
The Company and its subsidiaries have complied and are in
compliance with all applicable statutes, laws, rules, regulations
and orders of the United States of America and all states
thereof, foreign countries and other governmental bodies and
agencies having jurisdiction over their respective businesses or
properties, except where such failure to comply would not
reasonably be likely to have a Material Adverse Effect on the
Company.
(i) SEC Documents.
(i) Reports. The Company has furnished to the
Investor prior to the date hereof copies of its Annual Report on
Form 10-KSB/A-1 for the fiscal year ended December 31, 1998
("Form 10-K"), its Quarterly Reports on Form 10-QSB for the
fiscal quarters ended March 31, 1999 and June 30, 1999 (the "Form
10-Q's"), and all other registration statements, reports and
proxy statements filed by the Company with the SEC on or after
December 31, 1997 (the Form 10-K, the Form 10-Q's and such
registration statements, reports and proxy statements are
collectively referred to herein as the "SEC Documents"). Except
to the extent that information contained in any SEC Document has
been revised or superseded by a later SEC Document filed and
publicly available prior to the date of this Agreement, each of
the SEC Documents, as of the respective date thereof (or if
amended or superseded by a filing prior to the Closing Date, then
on the date of such filing), did not, and each of the
registration statements, reports and proxy statements filed by
the Company with the SEC after the date hereof and prior to the
Closing will not, as of the date thereof (or if amended or
superseded by a filing after the date of this Agreement, then on
the date of such filing), contain any untrue statement of a
material fact or omit to state a material fact necessary in order
to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
Neither the Company nor any of its subsidiaries is a party to any
material contract, agreement or other arrangement that was
required to have been filed as an exhibit to the SEC Documents
that was not so filed.
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(ii) Financial Statements. The Company has provided
the Investor with copies of its audited financial statements for
the fiscal year ended December 31, 1998, and its unaudited
financial statements for the six-month period ended June 30, 1999
(the "Balance Sheet Date"). Since the Balance Sheet Date, the
Company has duly filed with the SEC all registration statements,
reports and proxy statements required to be filed by it under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Securities Act. The audited and unaudited consolidated
financial statements of the Company included in the SEC Documents
filed prior to the date hereof fairly present, in conformity with
generally accepted accounting principles ("GAAP") (except, in the
case of the Forms 10-QSB and 8-K, as may otherwise be permitted
by Form 10-QSB and Forms 8-K) applied on a consistent basis
(except as otherwise may be stated in the notes thereto), the
consolidated financial position of the Company as at the dates
thereof and the consolidated results of its operations and cash
flows for the periods then ended (subject to normal year-end
audit adjustments in the case of unaudited interim financial
statements).
(j) Absence of Certain Changes Since Balance Sheet Date.
Since the Balance Sheet Date, the businesses and operations of
the Company and its subsidiaries have been conducted in the
ordinary course consistent with past practice, and there has not
been:
(i) any declaration, setting aside or payment of any
dividend or other distribution of the assets of the Company or
any of its subsidiaries with respect to any shares of capital
stock of the Company or such subsidiary (except for any such
distribution by a wholly-owned subsidiary to the Company) or any
repurchase, redemption or other acquisition by the Company or any
of its subsidiaries of any outstanding shares of the Company's
capital stock;
(ii) any damage, destruction or loss, whether or not
covered by insurance, except for such occurrences, individually
and collectively, that are not material to the Company and its
subsidiaries, taken as a whole;
(iii) any waiver by the Company or any of its
subsidiaries of a valuable right or of a material debt owed to
it, except for such waivers, individually and collectively, that
are not material;
(iv) any material change or amendment to, or any waiver
of any material right under a material contract or arrangement by
which the Company or any of its subsidiaries or any of their
respective assets and properties is bound or subject, except for
changes, amendments or waivers that are expressly provided for or
disclosed in this Agreement;
(v) any change by the Company in its accounting
principles, methods or practices or in the manner it keeps its
accounting books and records, except any such change required by
a change in GAAP; or
(vi) any other event or condition of any character,
except for such events and conditions that have not resulted, and
could not reasonably be expected to result, either individually
or in the aggregate, in a Material Adverse Effect on the Company.
(k) Invention Assignment and Confidentiality Agreements.
Each employee and consultant or independent contractor of the
Company or any of its subsidiaries whose duties
6
include the development of products or Intellectual Property (as
defined below), and each former employee and consultant or
independent contractor whose duties included the development of
products or Intellectual Property, has entered into and executed
an invention assignment and confidentiality agreement in
customary form or an employment or consulting agreement
containing substantially similar terms.
(l) Intellectual Property.
(i) Ownership or Right to Use. Each of the Company
and its subsidiaries has sole title to and owns, or is licensed
or otherwise possesses legally enforceable rights to use, all
patents or patent applications, software, know-how, registered or
unregistered trademarks and service marks and any applications
therefor, registered or unregistered copyrights, trade names, and
any applications therefor, trade secrets or other confidential or
proprietary information (collectively, "Intellectual Property")
necessary to enable it to carry on its business as currently
conducted, except where any deficiency, or group of deficiencies,
would not be reasonably likely to have a Material Adverse Effect
on the Company.
(ii) Licenses; Other Agreements. Neither the Company
nor any of its subsidiaries is currently the licensee of any
material portion of the Intellectual Property of the Company and
its subsidiaries. There are not outstanding any licenses or
agreements of any kind relating to any Intellectual Property
owned by the Company or any of its subsidiaries, except for
agreements with customers entered into in the ordinary course of
its business and other licenses and agreements that,
collectively, are not material. Neither the Company nor any of
its subsidiaries is obligated to pay any royalties or other
payments to third parties with respect to the marketing, sale,
distribution, manufacture, license or use of any Intellectual
Property, except as the Company or any such subsidiary may be so
obligated in the ordinary course of its business, as disclosed in
the Company's SEC Documents or where the aggregate amount of such
payments could not reasonably be expected to be material.
(iii) No Infringement. Neither the Company nor any
of its subsidiaries has violated or infringed in any material
respect, neither the Company nor any of its Subsidiaries is
currently violating or infringing in any material respect, and
neither the Company nor any of its subsidiaries has received any
communications alleging that it (or any of its employees or
consultants) has violated or infringed, any Intellectual Property
of any other person or entity, except for any such violations or
infringements that would not be reasonably likely to have a
Material Adverse Effect on the Company.
(iv) Employees and Consultants. To the best of the
Company's knowledge, no employee of or consultant to the Company
or any of its subsidiaries is in material default under any term
of any material employment contract, agreement or arrangement
relating to Intellectual Property of the Company or any such
subsidiary or any material non-competition arrangement, other
contract or restrictive covenant relating to the Intellectual
Property of the Company or any such subsidiary. The Intellectual
Property of the Company or any of its subsidiaries (other than
any Intellectual Property duly acquired or licensed from third
parties) was developed entirely by the employees of or
consultants to the Company or one of its subsidiaries during the
time they were employed or retained by it, and to the best
knowledge of the Company, at no time during conception or
reduction to practice of such Intellectual Property
7
of the Company or any of its subsidiaries were any such employees
or consultants operating under any grant from a government entity
or agency or subject to any employment agreement or invention
assignment or non-disclosure agreement or any other obligation
with a third party that would materially and adversely affect the
Company's or such subsidiary's rights in its Intellectual
Property. Such Intellectual Property of the Company or any of
its subsidiaries does not, to the best knowledge of the Company,
include any invention or other intellectual property of such
employees or consultants made prior to the time such employees or
consultants were employed or retained by the Company or any such
subsidiary nor any intellectual property of any previous employer
of such employees or consultants nor the intellectual property of
any other person or entity.
(v) Year 2000 Compliance.
(a) All of the Company's and its subsidiaries'
material products (including products currently under
development) will record, store, process and calculate and
present calendar dates falling on and after December 31, 1998,
and will calculate any information dependent on or relating to
such dates in the same manner and with the same functionality,
data integrity and performance as the products record, store,
process, calculate and present calendar dates on or before
December 31, 1998, or calculate any information dependent on or
relating to such dates (collectively, "Year 2000 Compliant").
All of the Company's and its subsidiaries' material products will
lose no significant functionality with respect to the
introduction of records containing dates falling on or after
December 31, 1998. All of the Company's and its subsidiaries'
internal computer systems comprised of software, hardware,
databases or embedded control systems (microprocessor controlled,
robotic or other device) related to the Company's and its
subsidiaries' businesses (collectively, a "Business System"),
that constitutes any material part of, or is used in connection
with the use, operation or enjoyment of, any material tangible or
intangible asset or real property of the Company and its
subsidiaries, including its accounting systems, are Year 2000
Compliant. The current versions of the Company's and its
subsidiaries' software and all other Intellectual Property may be
used prior to, during and after December 31, 1998, such that such
software and Intellectual Property will operate prior to, during
and after such time period without error caused by date data that
represents or references different centuries or more than one
century.
(b) To the best knowledge of the Company, all of
the Company's and its subsidiaries' products and the conduct of
the Company's and its subsidiaries' businesses with customers and
suppliers will not be materially adversely affected by the advent
of the year 2000, the advent of the twenty-first century or the
transition from the twentieth century through the year 2000 and
into the twenty-first century. To the best knowledge of the
Company, neither the Company nor any of its subsidiaries is
reasonably likely to incur expenses arising from or relating to
the failure of any of its Business Systems or any products
(including all products sold on or prior to the date hereof) as a
result of the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century
through the year 2000, except for such expenses that will not
have a Material Adverse Effect on the Company.
(m) Subsidiaries. Section 3(m) of the Disclosure Schedule
sets forth all other persons, entities, or businesses in which
the Company presently owns or controls, directly or indirectly,
more than a 1% interest.
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(n) Environmental Matters. During the period that the
Company or any of its subsidiaries has owned or leased its
properties and facilities, (i) there have been no disposals,
releases or threatened releases of Hazardous Materials on, from
or under such properties or facilities which, either individually
or in the aggregate, would have a Material Adverse Effect on the
Company, and (ii) neither the Company, any of its subsidiaries
nor, to the Company's knowledge, any other person or entity, has
used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such
properties or facilities any Hazardous Materials, where such use,
generation, manufacture or storage, either individually or in the
aggregate, would have a Material Adverse Effect on the Company.
The Company has no knowledge of any presence, disposals, releases
or threatened releases of Hazardous Materials on, from or under
any of such properties or facilities, which may have occurred
prior to the Company or any of its subsidiaries having taken
possession of any of such properties or facilities and which,
either individually or in the aggregate, would have a Material
Adverse Effect on the Company. For purposes of this Agreement,
the terms "disposal," "release," and "threatened release" shall
have the definitions assigned thereto by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601 et seq., as amended ("CERCLA"). For
purposes of this Agreement, "Hazardous Materials" means any
hazardous or toxic substance, material or waste which is
regulated under, or defined as a "hazardous substance",
"pollutant", "contaminant", "toxic chemical", "hazardous
material", "toxic substance" or "hazardous chemical" under
(A) CERCLA; (B) the Emergency Planning and Community Right-to-
Know Act, 42 U.S.C. Section 11001 et seq.; (C) the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq.;
(D) the Toxic Substances Control Act, 15 U.S.C. Section 2601 et
seq.; (E) the Occupational Safety and Health Act of 1970,
29 U.S.C. Section 651 et seq.; (F) regulations promulgated under
any of the above statutes; or (G) any applicable state or local
statute, ordinance, rule, or regulation that has a scope or
purpose similar to those statutes identified above.
(o) Registration Rights. The Company is not currently
subject to any agreement providing any person or entity with any
rights (including piggyback registration rights) to have any
securities of the Company registered with the SEC or registered
or qualified with any other governmental authority.
(p) Title to Property and Assets. The properties and
assets of the Company or any of its subsidiaries are owned by the
Company or such subsidiary free and clear of all mortgages, deeds
of trust, liens, charges, encumbrances and security interests
except for statutory liens for the payment of current taxes that
are not yet delinquent and liens, encumbrances and security
interests that arise in the ordinary course of business and do
not in any material respect affect the properties and assets of
the Company or such subsidiary. With respect to the property and
assets it leases, each of the Company and its subsidiaries is in
compliance with such leases in all material respects.
(q) Tax Matters. Each of the Company and its subsidiaries
has filed all material tax returns required to be filed, which
returns are true and correct in all material respects, and each
of the Company and its subsidiaries has paid in full all taxes
that have become due on or prior to the date hereof, including
penalties and interest, assessments, fees and other charges,
other than those being contested in good faith and for which
adequate reserves have
9
been provided or those currently payable without interest that
were payable pursuant to said returns or any assessments with
respect thereto.
(r) Brokers and Finders. None of the Company, its
subsidiaries, their respective directors or officers and their
respective agents has incurred any obligation or liability,
contingent or otherwise, for brokerage or finders' fees or
agents' commissions or other similar payment in connection with
this Agreement or any of the transactions contemplated hereby.
The Company will indemnify and hold the Investor harmless from
any brokerage or finder's fees or agents' commissions or other
similar payment alleged to be due by or through the Company or
any of such other persons and entities as a result of the action
of the Company, its subsidiaries, their respective directors or
officers or their respective agents.
(s) Interested Party Transactions. To the best knowledge
of the Company, no officer or director of the Company or any of
its subsidiaries or any "affiliate" or "associate" (as those
terms are defined in Rule 405 promulgated under the Securities
Act) of any such person or entity has had, either directly or
indirectly, a material interest in: (i) any person or entity
which purchases from or sells, licenses or furnishes to the
Company or any of its subsidiaries any goods, property,
technology, intellectual or other property rights or services; or
(ii) any contract or agreement to which the Company or any of its
subsidiaries is a party or by which it or any of its properties
and assets may be bound or affected.
(t) Full Disclosure. The information contained in this
Agreement, the Disclosure Schedule and the SEC Documents with
respect to the business, operations, assets, results of
operations and financial condition of the Company and its
subsidiaries, and the transactions contemplated by this Agreement
, are true and complete in all material respects and do not omit
to state any material fact or facts necessary in order to make
the statements therein, in light of the circumstances under which
they were made, not misleading.
4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF THE
INVESTOR. The Investor hereby represents and warrants to the
Company, and agrees that:
(a) Organization, Good Standing and Qualification. The
Investor is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all
corporate power and authority required to own or lease its
properties and assets and carry on its business as presently
conducted. The Investor is qualified to do business and is in
good standing in each jurisdiction in which the failure to so
qualify or be in good standing, either individually or in the
aggregate, would have a Material Adverse Effect on the Investor.
(b) Due Authorization. The execution of this Agreement has
been duly authorized by all necessary corporate action on the
part of the Investor. This Agreement constitutes the Investor's
legal, valid and binding obligation, enforceable against the
Investor in accordance with its terms, except (i) as may be
limited by (A) applicable bankruptcy, insolvency, reorganization
or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (B) the effect of
rules of law governing the availability of
10
equitable remedies and (ii) as rights to indemnity or
contribution may be limited under federal or state securities
laws or by principles of public policy hereunder.
(c) Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation,
declaration or filing with, any federal, state or local
governmental authority on the part of the Investor is required in
connection with the purchase of the Purchased Shares by the
Investor pursuant to this Agreement.
(d) Non-Contravention. The execution, delivery and
performance of this Agreement by the Investor, and the
consummation by the Investor of the transactions contemplated
hereby, do not (i) contravene or conflict with the Certificate of
Incorporation or Bylaws of the Investor, in each case as amended;
(ii) constitute a violation of any provision of any federal,
state, local or foreign law binding upon or applicable to the
Investor; or (iii) constitute a default or require any consent
under, give rise to any right of termination, cancellation or
acceleration of, or to a loss of any benefit to which the
Investor is entitled under, or result in the creation or
imposition of any lien, claim or encumbrance on any assets of the
Investor under, any contract to which the Investor is a party or
any permit, license or similar right relating to the Investor or
by which the Investor may be bound or affected.
(e) Litigation. There is no Action pending that seeks to
prevent, enjoin, alter or delay the transactions contemplated by
this Agreement.
(f) Purchase for Own Account. The Purchased Shares are
being acquired for investment for the Investor's own account, not
as a nominee or agent, and not with a view to the public resale
or distribution thereof within the meaning of the Securities Act,
and the Investor has no present intention of selling, granting
any participation in, or otherwise distributing the same. The
Investor also represents that it has not been formed for the
specific purpose of acquiring the Purchased Shares.
(g) Investment Experience. The Investor understands that
the purchase of the Purchased Shares involves substantial risk.
The Investor has experience as an investor in securities of
companies and acknowledges that it is able to fend for itself,
can bear the economic risk of its investment in the Purchased
Shares and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and
risks of this investment in the Purchased Shares and protecting
its own interests in connection with this investment.
(h) Accredited Investor Status. The Investor is an
"accredited investor" within the meaning of Regulation D
promulgated under the Securities Act. The Investor's
headquarters are located in the State of California.
(i) Restricted Securities. The Investor understands that
the Purchased Shares are characterized as "restricted securities"
under the Securities Act, inasmuch as they are being acquired
from the Company in a transaction not involving a public offering
and that under the Securities Act and applicable regulations
thereunder such securities may be resold without registration
under the Securities Act only in certain limited circumstances.
The Investor is
11
familiar with Rule 144 of the SEC, as presently in effect, and
understands the resale limitations imposed thereby and by the
Securities Act.
(j) Legends. The Investor agrees that the certificates for
the Purchased Shares shall bear the following legend:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933 or
with any state securities commission, and may not be
transferred or disposed of by the holder in the
absence of a registration statement which is effective
under the Securities Act of 1933 and applicable state
laws and rules, or, unless, immediately prior to the
time set for transfer, such transfer may be effected
without violation of the Securities Act of 1933 and
other applicable state laws and rules."
In addition, the Investor agrees that the Company may place stop
transfer orders with its transfer agents with respect to such
certificates. The appropriate portion of the legend and the stop
transfer orders will be removed promptly upon delivery to the
Company of such satisfactory evidence as reasonably may be
required by the Company that such legend or stop orders are not
required to ensure compliance with the Securities Act.
5. CONDITIONS TO THE INVESTOR'S OBLIGATIONS AT CLOSING.
The obligations of the Investor under this Agreement are subject
to the fulfillment or waiver, on or before the Closing, of each
of the following conditions:
(a) Representations and Warranties True. Each of the
representations and warranties of the Company contained in
Section 3 shall be true and correct in all material respects on
and as of the date of the Disclosure Schedule (as defined in
Section 7(a)) and on and as of the date of the Closing, except as
set forth in the Disclosure Schedule, with the same effect as
though such representations and warranties had been made as of
the Closing.
(b) Performance. The Company shall have performed and
complied with all agreements, obligations and conditions
contained in this Agreement that are required to be performed or
complied with by it on or before the Closing and shall have
obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
(c) Securities Exemptions. The offer and sale of the
Purchased Shares to the Investor pursuant to this Agreement shall
be exempt from the registration requirements of the Securities
Act and the registration and/or qualification requirements of all
applicable state securities laws.
(d) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at
the Closing and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Investor,
and the Investor shall have received all such counterpart
originals and certified or other copies of such documents as it
may reasonably request. Such documents shall include but not be
limited to the following:
12
(i) Certified Charter Documents. A copy of (i) the
Certificate of Incorporation certified as of a recent date by the
Secretary of State of Delaware as a complete and correct copy
thereof, and (ii) the Bylaws of the Company (as amended through
the Closing Date) certified by the Secretary of the Company as a
true and correct copy thereof as of the Closing Date.
(ii) Board Resolutions. A copy, certified by the
Secretary of the Company, of the resolutions of the Board
providing for the approval of this Agreement and the issuance of
the Purchased Shares and the other matters contemplated hereby.
(e) Opinion of Company Counsel. The Investor will have
received an opinion on behalf of the Company, dated the Closing
Date, from Davis, Graham & Stubbs LLP, counsel to the Company, in
the form attached hereto as Exhibit A.
(f) Nasdaq Requirements. All requirement of Nasdaq in
connection with the transactions contemplated by this Agreement
shall have been complied with by the Company. The Purchased
Shares shall have been approved for quotation on Nasdaq.
(g) Execution and Delivery of License Agreement. The
Company shall have executed and delivered that certain License
Agreement with respect to the transactions contemplated by the
Term Sheet dated September 15, 1999 (the "License Agreement").
(h) Payment of Expense Reimbursement. The Company shall
have paid the Investor the amount of $15,000 as a reimbursement
of the Investor's legal fees and expenses in connection with the
transactions contemplated hereby.
(i) Other Actions. The Company shall have executed such
certificates, agreements, instruments and other documents, and
taken such other actions as shall be customary or reasonably
requested by the Investor in connection with the transactions
contemplated hereby.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to the Investor under this Agreement
are subject to the fulfillment or waiver, on or before the
Closing, of each of the following conditions:
(a) Representations and Warranties True. The
representations and warranties of the Investor contained in
Section 4 shall be true and correct in all material respects on
and as of the date hereof and on and as of the date of the
Closing with the same effect as though such representations and
warranties had been made as of the Closing.
(b) Performance. The Investor shall have performed and
complied with all agreements, obligations and conditions
contained in this Agreement that are required to be performed or
complied with by it on or before the Closing and shall have
obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
(c) Payment of Purchase Price. The Investor shall have
delivered to the Company the Purchase Price as specified in
Section 1(b).
13
(d) Securities Exemptions. The offer and sale of the
Purchased Shares to the Investor pursuant to this Agreement shall
be exempt from the registration requirements of the Securities
Act and the registration and/or qualification requirements of all
applicable state securities laws.
(e) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at
the Closing and all documents incident thereto will be reasonably
satisfactory in form and substance to the Company, and the
Company will have received all such counterpart originals and
certified or other copies of such documents as it may reasonably
request.
(f) Nasdaq Requirements. All requirements of Nasdaq in
connection with the transactions contemplated by this Agreement
shall have been complied with.
(g) Execution and Delivery of License Agreement. The
Investor shall have executed and delivered the License Agreement.
(h) Other Actions. The Investor shall have executed such
certificates, agreements, instruments and other documents, and
taken such other actions as shall be customary or reasonably
requested by the Company in connection with the transactions
contemplated hereby.
7. COVENANTS OF THE PARTIES.
(a) Disclosure Schedule. On or prior to the Closing Date,
the Company has delivered to the Investor a disclosure letter,
which shall set forth exceptions, if any, to the representations
and warranties made by the Company in Article 3. Such disclosure
letter is organized such that any exceptions specifically
identify the representation and warranty, by section, to which
they relate, and clearly identify the nature of the exception, to
the Investor's reasonable satisfaction (the "Disclosure
Schedule"). In any determination of whether the Investor is
entitled to indemnification for the breach of any representations
or warranties set forth in this Agreement, only the Disclosure
Schedule (i.e., the final disclosure letter agreed upon by the
Company and the Investor) shall be relevant, and the
identification of any matters on any drafts of the Disclosure
Schedule shall not be introduced as evidence or otherwise used in
any manner in connection therewith.
(b) Information Rights.
(i) Financial Information. The Company covenants and
agrees that, commencing on the Closing Date and continuing for so
long as the Investor holds any Purchased Shares, the Company
shall:
(A) Annual Reports. Furnish to the Investor
promptly following the filing of such report with the SEC a copy
of the Company's Annual Report on Form 10-KSB for each fiscal
year, which shall include a consolidated balance sheet as of the
end of such fiscal year, a consolidated statement of income and a
consolidated statement of cash flows of the Company for such
year, setting forth in each case in comparative form the figures
from the Company's previous fiscal year, all prepared in
accordance with GAAP and generally
14
accepted accounting practices, and audited by nationally-
recognized independent certified public accountants. In the
event the Company shall no longer be required to file Annual
Reports on Form 10-KSB, the Company shall, within ninety (90)
days following the end of each respective fiscal year, deliver to
the Investor a copy of such balance sheets, statements of income
and statements of cash flows.
(B) Quarterly Reports. Furnish to the Investor
promptly following the filing of such report with the SEC, a copy
of each of the Company's Quarterly Reports on Form 10-QSB, which
shall include a consolidated balance sheet as of the end of the
respective fiscal quarter, consolidated statements of income and
cash flows of the Company for the respective fiscal quarter and
for the year to-date, setting forth in each case in comparative
form the figures from the comparable periods in the Company's
immediately preceding fiscal year, all prepared in accordance
with GAAP and generally accepted accounting practices (except, in
the case of any Form 10-QSB, as may otherwise be permitted by
Form 10-Q), but all of which may be unaudited. In the event the
Company shall no longer be required to file Quarterly Reports on
Form 10-QSB, the Company shall, within forty-five (45) days
following the end of each of the first three (3) fiscal quarters
of each fiscal year, deliver to the Investor a copy of such
balance sheets, statements of income and statements of cash
flows.
(ii) SEC Filings. The Company shall deliver to the
Investor copies of each other document filed with the SEC on a
non-confidential basis promptly following the filing of such
document with the SEC.
(c) Registration Rights.
(i) Definitions. For purposes of this Section 7(c):
(A) Registration. The terms "register,"
"registered," and "registration" refer to a registration effected
by preparing and filing a registration statement in compliance
with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement.
(B) Registrable Securities. The term
"Registrable Securities" means: (x) the Purchased Shares;
(y) any other shares of Common Stock acquired by the Investor
after the date hereof which are not already freely tradable under
the Securities Act (pursuant to Rule 144(k) promulgated under the
Securities Act); and (z) any shares of Common Stock or other
securities of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security
that is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, any of the
securities described in the immediately preceding Clause (x) or
(y). Notwithstanding the foregoing, "Registrable Securities"
shall exclude any Registrable Securities sold by a person or
entity in a transaction in which rights under this Section 7(c)
are not assigned in accordance with this Agreement or any
Registrable Securities sold in a public offering, whether sold
pursuant to Rule 144 promulgated under the Securities Act, or in
a registered offering, or otherwise.
(C) Registrable Securities Then Outstanding. The
number of shares of "Registrable Securities then outstanding"
shall mean the number of Purchased Shares,
15
other shares of Common Stock and other securities that are
Registrable Securities and are then issued and outstanding.
(D) Holder. For purposes of this Section 7(c),
the term "Holder" means any person or entity owning of record
Registrable Securities that have not been sold to the public or
pursuant to Rule 144 promulgated under the Securities Act or any
permitted assignee of record of such Registrable Securities to
whom rights under this Section 7(c) have been duly assigned in
accordance with this Agreement.
(E) Form S-3. The term "Form S-3" means such
form under the Securities Act as is in effect on the date hereof
or any successor registration form under the Securities Act
subsequently adopted by the SEC that permits inclusion or
incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(ii) Demand Registration.
(A) Request by Holders. If, at any time after
the date which is four (4) months after the Closing Date, the
Company shall, following the Closing, receive a written request
from the Holders of at least twenty-five percent (25%) of the
Purchased Shares issued at the Closing, that the Company file a
registration statement under the Securities Act on Form S-3, or
any successor form (including a "shelf" registration statement,
if requested by such Holders, during any period of time that
Rule 144 is not available as an exemption for the sale in a
single 90-day period of all of the Registrable Securities that
any such Holder desires to sell, in which case the Company would
maintain the effectiveness of such "shelf" registration statement
until all such Registrable Securities could be sold under
Rule 144 in a single 90-day period) covering the registration of
Registrable Securities (provided that such Form S-3 or successor
form shall also contain any information required to be included
on Form S-1 that the Investor may in its sole discretion
request), then the Company shall, within ten (10) business days
of the receipt of such written request, give written notice of
such request ("Request Notice") to all Holders, and use
commercially reasonable efforts to effect, as soon as
practicable, the registration under the Securities Act of all
Registrable Securities that Holders request to be registered and
included in such registration by written notice given by such
Holders to the Company within twenty (20) days after receipt of
the Request Notice; provided, however, that the Company shall not
be obligated to effect any such registration if the Company has,
within the six (6) month period preceding the date of such
request, already effected a registration under the Securities Act
pursuant to Section 7(c)(iii), other than a registration from
which the Registrable Securities of Holders have been excluded
with respect to all or any portion of the Registrable Securities
the Holders requested be included in such registration.
(B) Underwriting. If the Holders initiating the
registration request under this Section 7(c)(ii) ("Initiating
Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, then they shall so
advise the Company as a part of their request, and the Company
shall include such information in the written notice referred to
in Section 7(c)(ii)(A). In such event, the right of any Holder
to include his or her Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting (unless otherwise mutually agreed
by a majority in interest of the initiating Holders
16
and such Holder determined based on the number of Registrable
Securities held by such Holders being registered). All Holders
proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter or underwriters
selected for such underwriting by the Holders of a majority of
the Registrable Securities being registered and reasonably
acceptable to the Company (including a market stand-off agreement
of up to 90 days if required by such underwriters).
Notwithstanding any other provision of this Section 7(c)(ii), if
the underwriter(s) advise(s) the Company in writing that
marketing factors require a limitation of the number of
securities to be underwritten then the Company shall so advise
all Holders of Registrable Securities that would otherwise be
registered and underwritten pursuant hereto, and the number of
Registrable Securities that may be included in the underwriting
shall be reduced as required by the underwriter(s) and allocated
among the Holders of Registrable Securities on a pro rata basis
according to the number of Registrable Securities then
outstanding held by each Holder requesting registration
(including the initiating Holders); provided, however, that the
number of shares of Registrable Securities to be included in such
underwriting and registration shall not be reduced unless all
other securities of the Company and any selling securityholder
who is a director, officer, employee, consultant or affiliate of
the Company are first entirely excluded from the underwriting and
registration. Any Registrable Securities excluded and withdrawn
from such underwriting shall be withdrawn from the registration.
(C) Maximum Number of Demand Registrations. The
Company shall be obligated to effect only three (3) registration
pursuant to this Section 7(c)(ii).
(D) Deferral. Notwithstanding the foregoing, if
the Company shall furnish to Holders requesting the filing of a
registration statement pursuant to this Section 7(c)(ii) a
certificate signed by the President or Chief Executive Officer of
the Company stating that in the good faith judgment of the Board,
it would be materially detrimental to the Company and its
stockholders for such registration statement to be filed, then
the Company shall have the right to defer such filing for a
period of not more than sixty (60) days after receipt of the
request of the initiating Holders; provided, however, that the
Company may not utilize this right more than once in any twelve
(12) month period.
(E) Expenses. All expenses incurred in
connection with any registration pursuant to this
Section 7(c)(ii), including all federal and "blue sky"
registration, filing and qualification fees, printer's and
accounting fees, and fees and disbursements of counsel for the
Company (but excluding underwriters' discounts and commissions
relating to shares sold by the Holders), shall be borne by the
Company. Each Holder participating in a registration pursuant to
this Section 7(c)(ii) shall bear such Holder's proportionate
share (based on the total number of shares sold in such
registration other than for the account of the Company or any of
its directors, officers, employees, consultants and affiliates)
of all discounts, commissions or other amounts payable to
underwriters or brokers in connection with such offering by the
Holders. Notwithstanding the foregoing, the Company shall not be
required to pay for any expenses of any registration proceeding
begun pursuant to this Section 7(c)(ii) if the registration
request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered,
unless the Holders of such majority agree that such registration
constitutes the use by the Holders of one (1) demand registration
pursuant to this Section 7(c)(ii) (in which case such
registration shall also constitute the use by all Holders of
Registrable Securities of one (l)
17
such demand registration); provided further, that if at the time
of such withdrawal, the Holders have learned of a material
adverse change relating to the Company or the United States
financial markets not known to the Holders at the time of their
request for such registration and have withdrawn their request
for registration after learning of such material adverse change,
then the Holders shall not be required to pay any of such
expenses and such registration shall not constitute the use of a
demand registration pursuant to this Section 7(c)(ii).
(iii) Piggyback Registrations. The Company shall
notify all Holders of Registrable Securities in writing at least
twenty (20) days prior to filing any registration statement under
the Securities Act for purposes of effecting a public offering of
securities of the Company (including registration statements
relating to secondary offerings of securities of the Company, but
excluding registration statements relating to any employee
benefit plan or any merger or other corporate reorganization, any
registration statement under Rule 462(b) filed with respect to
any effective registration statement and one registration
statement filed with the SEC on or before November 30, 1999 with
respect to the resale of shares issued in connection with the
Company's acquisition of Technologic, Inc.) and will afford each
such Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities then held
by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable
Securities held by such Holder shall, within ten (10) business
days after receipt of the above-described notice from the
Company, so notify the Company in writing, and in such notice
shall inform the Company of the number of Registrable Securities
such Holder wishes to include in such registration statement. If
a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company,
such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration
statement or registration statements as may be filed by the
Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein. Notwithstanding the
foregoing, the Holders of Registrable Securities shall not have
the rights set forth in this Section 7(c)(iii) in connection with
any registration statement demanded by Brown Simpson Strategic
Growth Fund, L.P. or Brown Simpson Strategic Growth Fund, Ltd.
(collectively, the "Brown Simpson Entities") pursuant to that
certain Registration Rights Agreement dated June 10, 1999 among
the Company and the Brown Simpson Entities.
(A) Underwriting. If a registration statement
under which the Company gives notice under this Section 7(c)(iii)
is for an underwritten offering, then the Company shall so advise
the Holders of Registrable Securities. In such event, the right
of any such Holder's Registrable Securities to be included in
such a registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent
provided herein. All Holders proposing to distribute their
Registrable Securities through such underwriting shall enter into
an underwriting agreement in customary form with the managing
underwriter or underwriters selected for such underwriting
(including a market stand-off agreement of up to 90 days if
required by such underwriters); provided, however, that it shall
not be considered customary to require any of the Holders to
provide representations and warranties regarding the Company or
indemnification of the underwriters for material misstatements or
omissions in the registration statement or prospectus for such
offering. Notwithstanding any other provision of this Agreement,
if the managing underwriter determine(s) in good faith that
marketing factors require a limitation of the number of shares to
be underwritten, then the managing underwriter(s) may
18
exclude shares from the registration and the underwriting;
provided, however, that the securities to be included in the
registration and the underwriting shall be allocated as follows:
(1) first to the Company (provided, however, that a minimum of
fifteen percent (15%) of the number of Registrable Securities
held by each Holder (where any Registrable Securities that are
not shares of Common Stock but are exercisable or exchangeable
for, or convertible into, shares of Common Stock, shall be deemed
to have been so exercised, exchanged or converted for such
purpose) must also in any event be included if requested by any
such Holder); (2) second, to the extent the managing underwriter
determines additional securities can be included after compliance
with Clause (1), to each of the Holders (to the extent not
included pursuant to Clause (1)) requesting inclusion of their
Registrable Securities in such registration statement on a pro
rata basis based on the total number of Registrable Securities
and other securities entitled to registration then held by each
such Holder; and (3) third, to the extent the managing
underwriter determines additional securities can be included
after compliance with Clauses (1) and (2), any other shares of
Common Stock or other securities of the Company. Any Registrable
Securities excluded or withdrawn from such underwriting shall be
excluded and withdrawn from the registration. For any Holder
that is a partnership, the Holder and the partners and retired
partners of such Holder, or the estates and family members of any
such partners and retired partners and any trusts for the benefit
of any of the foregoing persons, and for any Holder that is a
corporation, the Holder and all corporations that are affiliates
of such Holder, shall be deemed to be a single "Holder," and any
pro rata reduction with respect to such "Holder" shall be based
upon the aggregate amount of shares carrying registration rights
owned by all entities and individuals included in such "Holder,"
as defined in this sentence.
(B) Expenses. All expenses incurred in
connection with a registration pursuant to this Section 7(c)(iii)
(excluding underwriters' and brokers' discounts and commissions
relating to shares sold by the Holders), including all federal
and "blue sky" registration, filing and qualification fees,
printers' and accounting fees, and fees and disbursements o
