<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23901
CYBERSHOP.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3979226
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
116 Newark Avenue, Jersey City, NJ 07302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 234-5000
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
The number of shares of the Registrant's common stock, par value $.001 per
share, outstanding on November 5, 1999 was 9,398,012 shares.
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,714,000 $ 12,285,000
Accounts receivable, net of allowance for doubtful
accounts of $65,000 and $5,000, as of September 30,
1999 and December 31, 1998, respectively 789,000 176,000
Inventories 1,043,000 526,000
Prepaid expenses and other 708,000 375,000
------------ ------------
Total current assets 8,254,000 13,362,000
Property and equipment, net 1,945,000 1,944,000
Goodwill, net 13,880,000 --
Other assets 63,000 160,000
------------ ------------
Total assets $ 24,142,000 $ 15,466,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,247,000 $ 2,403,000
Accrued liabilities 911,000 1,953,000
Acquisition related payable 102,000 --
Deferred revenues 49,000 72,000
------------ ------------
Total current liabilities 5,309,000 4,428,000
Deferred rent 26,000 49,000
Capital lease obligation 71,000 --
------------ ------------
Total liabilities 5,406,000 4,477,000
------------ ------------
Stockholders' equity:
Common stock, $.001 par value; 75,000,000 shares
authorized; 9,396,678 and 7,493,350 shares issued and
outstanding as of September 30, 1999 and
December 31, 1998, respectively 9,000 7,000
Additional paid-in capital 31,936,000 18,318,000
Accumulated deficit (13,209,000) (7,336,000)
------------ ------------
Total stockholders' equity 18,736,000 10,989,000
------------ ------------
Total liabilities and stockholders' equity $ 24,142,000 $ 15,466,000
============ ============
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 2,780,000 $ 470,000 $ 5,890,000 $ 1,400,000
Advertising & set up fees 8,000 30,000 40,000 92,000
----------- ----------- ----------- -----------
Total revenues 2,788,000 500,000 5,930,000 1,492,000
Cost of revenues 1,828,000 360,000 4,205,000 1,055,000
----------- ----------- ----------- -----------
Gross profit 960,000 140,000 1,725,000 437,000
Operating expenses:
Sales and marketing 812,000 526,000 2,268,000 1,999,000
General and administrative 1,584,000 979,000 4,804,000 2,483,000
Amortization of goodwill and
other merger and acquisition
related costs 750,000 -- 1,009,000 --
----------- ----------- ----------- -----------
Total operating expenses 3,146,000 1,505,000 8,081,000 4,482,000
----------- ----------- ----------- -----------
Loss from operations (2,186,000) (1,365,000) (6,356,000) (4,045,000)
Interest income, net 15,000 212,000 230,000 461,000
Minority interest 9,000 -- 253,000 --
----------- ----------- ----------- -----------
Net loss $(2,162,000) $(1,153,000) $(5,873,000) $(3,584,000)
=========== =========== =========== ===========
Net loss per share, basic and diluted $ (0.25) $ (0.15) $ (0.73) $ (0.56)
Weighted average common shares
outstanding, basic and diluted 8,602,000 7,470,000 8,002,000 6,409,000
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
3
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,873,000) $ (3,584,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 508,000 128,000
Amortization of goodwill 990,000 --
Non-cash compensation expense 36,000 --
Minority interest (253,000) (12,000)
Increase (decrease) in cash from changes in:
Accounts receivable, net (613,000) 20,000
Inventories (517,000) (35,000)
Prepaid expenses and other (80,000) (261,000)
Other assets 97,000 84,000
Accounts payable 1,844,000 911,000
Accrued liabilities (1,027,000) (213,000)
Deferred revenues (23,000) (75,000)
Deferred rent (23,000) 15,000
------------ ------------
Net cash used in operating activities (4,934,000) (3,022,000)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (438,000) (1,960,000)
Acquisitions of businesses, net of cash acquired (6,658,000) --
------------ ------------
Net cash used in investing activities (7,096,000) (1,960,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 5,038,000 18,851,000
Minority capital contribution in joint venture -- 98,000
Proceeds from exercise of stock options 421,000 --
Proceeds of short-term loan -- 500,000
Repayment of short-term loan -- (500,000)
Payments of capital lease obligations -- (28,000)
------------ ------------
Net cash provided by financing activities 5,459,000 18,921,000
------------ ------------
Net increase (decrease) in cash (6,571,000) 13,939,000
Cash and cash equivalents, beginning of period 12,285,000 787,000
------------ ------------
Cash and cash equivalents, end of period $ 5,714,000 $ 14,726,000
============ ============
Supplemental cash flow information:
Common stock issued in connection with acquisition $ 8,125,000 --
Assets acquired under capital lease obligation $ 71,000 --
</TABLE>
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these consolidated statements.
4
<PAGE>
CYBERSHOP.COM, INC. AND SUBSIDIARIES
(Formerly Cybershop International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of the Business and Basis of Presentation
During the second quarter 1999 stockholders voted to change the Company's
name from Cybershop International, Inc. to Cybershop.com, Inc. (the "Company").
The Company is an online and direct to consumer retailer. The flagship store
located at www.cybershop.com offers discounted designer and brand-name apparel,
electronics, home accessories, toys, gifts and watches all at closeout prices.
electronics.net, located at www.electronics.net, offers a broad assortment of
consumer electronics, appliances and home office equipment for sale online.
The information presented as of September 30, 1999, and for the three and
nine-month periods ending September 30, 1999 and 1998, is unaudited, but, in the
opinion of management of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for the fair
presentation of the Company's financial position as of September 30, 1999, the
results of its operations for the three and nine-month periods ended September
30, 1999 and 1998 and its cash flows for the nine-month periods ended September
30, 1999 and 1998. The consolidated financial statements included herein have
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and accompanying notes for the year ended December 31, 1998, included
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission. Certain prior period amounts have been reclassified to
conform to the current period presentation.
2. Business Combinations
Effective June 1, 1999 the Company acquired all of the outstanding common
stock of The Magellan Group, Inc. ("Magellan"), an online and direct response
retailer of high quality personal care, home and health related products, in
exchange for 1,000,000 shares of the Company's common stock and $5,000,000 in
cash. The acquisition was accounted for as a purchase with essentially all of
the $14,870,000 purchase price allocated to goodwill. The goodwill in the
accompanying consolidated balance sheets is being amortized on a straight-line
basis over five years. The results of Magellan are included in the Company's
consolidated financial results beginning on the date of acquisition. In
addition, the Company is required to pay the former shareholders of Magellan
earn-out payments based upon the profitability of a particular product. As of
September 30, 1999, $361,000 of earnout payments have been made, and $102,000
are payable, to the former shareholders, which are reflected as Acquisition
related payable in the accompanying consolidated balance sheet. Concurrent with
the acquisition, one of these former shareholders of Magellan was appointed a
member of the Company's board of directors.
5
<PAGE>
The pro forma combined consolidated financial information for the nine
months ended September 30, 1999 and 1998, as though Magellan had been acquired
on January 1, 1998, would have resulted in net sales of $8,701,000 and
$5,368,000, net loss of $7,574,000 and $5,825,000, and basic and diluted net
loss per share of ($0.89) and ($0.79), respectively. The pro forma net loss
includes amortization of goodwill of $2,190,000 and $2,160,000 for the nine
months ended September 30, 1999 and 1998, respectively. This unaudited pro forma
combined consolidated financial information is presented for illustrative
purposes only and is not necessarily indicative of the consolidated results of
operations in future periods or the results that actually would have been
realized had the Company and Magellan been a combined company during the
specified periods.
On March 24, 1999 the Company issued 250,000 shares of common stock in
exchange for all of the outstanding common stock of Dealaday, Inc ("Dealaday").
Dealaday, an Internet retailer targeting off-price branded women's and
children's apparel and accessory products, began operations in February 1998.
The transaction was accounted for as a pooling of interests and, as a result,
the Company's financial statements have been restated for all periods presented.
Separate results for Dealaday included in the Company's results for the
periods prior to the acquisition consisted of net sales and net losses for the
nine-month period ending September 30, 1999 of $90,000 and $42,000,
respectively, and net sales and net losses for the nine-month period ending
September 30, 1998 of $92,000 and $71,000, respectively.
3. Advertising and Promotion Costs
The recognition of advertising costs is in accordance with the provisions
of the AICPA Statement of Position 93-7, Reporting of Advertising Costs.
Advertising costs other than direct response are expensed at the time the
initial advertising takes place. Direct response advertising costs are amortized
over the period, during which associated net revenues are expected, generally
approximating three months or less.
4. Commitments and Contingencies
Marketing Agreements
The Company has entered into certain marketing agreements, which include
fixed fees through the end of the current year ending December 31, 1999. The
expenses associated with these agreements are recognized on a systematic basis
over the term of the related agreements as services are received. Future minimum
commitments under the terms of these agreements are $112,000 during the
remainder of 1999 and $159,000 during 2000. During July 1999 the Company and an
internet media company providing promotions and advertising for the Company's
stores, agreed to terminate their existing agreement which as of September 30,
1999 had represented future commitments of $375,000 through the year 2000.
6
<PAGE>
5. Shareholders' Equity
On September 30, 1999 the Company completed a private placement of equity
securities raising gross proceeds of $5.1 million. The financing involved the
issuance of 784,616 shares of common stock at $6.50 per share and warrants to
purchase an aggregate of 156,922 shares of common stock at an exercise price of
$7.50 per share. The sale price of the Company's common stock and the exercise
price of the warrants issued in the private placement were both higher than the
last reported sale price of $5.81 on the Nasdaq National Market on September 30,
1999. As part of the financing another class of warrants was issued. These
warrants provide the investors with the right to receive additional shares if
the price of the Company's stock trades below certain levels. During each of
three consecutive 22 business day periods, after the effective date of a
registration statement filed with the Securities and Exchange Commission (the
SEC), a formula is applied to one-third of the shares sold. That formula is
based on determining the average of the twelve lowest closing bid prices in the
22 business day period. This average lowest bid price is divided into a number
equal to one-third of the shares sold multiplied by the difference between $7.56
and the average lowest bid price. If the average lowest bid price is higher than
$7.56 no additional shares will be issued. If the average lowest bid price is
less than $5.00 the Company has the option to pay the cash economic equivalent
instead of issuing shares. The Company agreed to register with the SEC, at the
Company's expense, on a Form S-3, the resale of the 784,616 shares sold in
addition to the shares underlying the warrants. None of the investors, together
with any affiliate thereof, may beneficially own shares in excess of 4.999% of
the outstanding shares of common stock following such conversion. Such
restrictions may be waived by each selling stockholder as to itself upon not
less than 61 days' notice to the Company. The Company is obligated to use its
best efforts to keep the Form S-3 effective for up to two years. The Company
will incur substantial penalties if it fails to meet these obligations.
At the Company's Annual Meeting of Stockholders held on June 3, 1999, the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from 25,000,000 to 75,000,000.
6. Stock Option Plan
At the Company's Annual Meeting of Stockholders held on June 3, 1999 the
Company's stockholders approved an amendment to the Company's 1998 Stock Option
Plan (the Plan) increasing the number of shares available for issuance from
1,000,000 to 3,000,000. During the nine months ended September 30, 1999, options
to purchase approximately 598,650 shares of the Company's Common Stock were
granted, at market value on date of grant, to employees under the Plan.
7. Subsequent event
In October 1999 Tops Appliance City, Inc. (TOPS), the Company's joint
venture partner in electronics.net, announced that it was discontinuing the sale
of consumer electronics products. The products which are currently offered by
electronics.net are obtained from TOPS. We believe that electronics.net will
have sufficient inventory available to it from TOPS to fulfill customer orders
for the near term, however, the Company is currently considering long term
alternatives for electronics.net including alternative supplier arrangements.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not
historical fact, but are forward-looking statements relating to matters such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical and anticipated results or other expectations
expressed in the Company's forward looking statements. Such forward-looking
statements may be identified by the use of certain forward-looking terminology,
such as "may," "will," "expect," "anticipate," "intend," "estimate," "believe,"
"goal," or "continue," or comparable terminology that involves risks or
uncertainties. Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of factors,
including, but not limited to those set forth under "Overview" and "Liquidity
and Capital Resources" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company has filed or files from time to time with the
Securities and Exchange Commission.
Overview
The Company is an online and direct to consumer retailer. The flagship store
located at www.cybershop.com offers discounted designer and brand-name apparel,
electronics, home accessories, toys, gifts and watches all at closeout prices.
electronics.net, the Company's joint venture with Tops Appliance City (Tops),
located at www.electronics.net, offers a broad assortment of consumer
electronics, appliances and home office equipment for sale online.
Beginning in the first quarter of the current year, the Company began
implementing several operating initiatives at its flagship store, cybershop.com,
designed to better serve its customers and streamline its operations. The
Company has completed a shift in its merchandising strategy to focus on offering
off-price branded merchandise such as that found in outlets and traditional
discount retailers. The Company initiated a significant overhaul of its
infrastructure, migrating its web-based order processing onto a new platform,
redesigning the web site and integrating it with a new order fulfillment system.
The transition to an inventory-based model was completed in the third quarter
with the development of a new distribution and fulfillment center. In addition,
the Company launched two new online auction sites. With this initiative, the
Company introduced the excitement of the online auction experience to all its
customers, complementing its existing product offerings. The initiative also
offers the Company a new way to attract customers, learn more about their
shopping preferences and provide an effective mechanism to manage excess
inventory.
8
<PAGE>
Effective June 1, 1999 the Company acquired all of the outstanding common
stock of The Magellan Group, Inc. ("Magellan"), an online and direct response
retailer of high quality personal care, home and health related products, in
exchange for 1,000,000 shares of the Company's common stock and $5,000,000 in
cash. The acquisition was accounted for as a purchase with essentially all of
the $14,870,000 purchase price allocated to goodwill. The goodwill in the
accompanying consolidated balance sheets is being amortized on a straight-line
basis over five years. The results of Magellan are included in the Company's
consolidated financial results beginning on the date of acquisition. In
addition, the Company is required to pay the former shareholders of Magellan
earn-out payments based upon the profitability of a particular product. As of
September 30, 1999, $361,000 of earnout payments have been made, and $102,000
are payable, to the former shareholders, which are reflected as Acquisition
related payable in the accompanying consolidated balance sheet. Concurrent with
the acquisition, one of these former shareholders of Magellan was appointed a
member of the Company's board of directors.
Results of Operations
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998.
Revenues: Revenue is comprised of sales of products, net of returns, outbound
shipping and handling charges, advertising and vendor set-up fees. Total
revenues increased 458% in the third quarter, or $2,288,000, to $2,788,000 as
compared to $500,000 in the third quarter of 1998. This increase was primarily
attributable to greater marketing efforts, an expanded customer base, repeat
purchases from existing customers, acquisitions, and strong sales of four
products, which represented approximately 45% of total revenues in the three
months ended September 30, 1999. Advertising and set-up fees decreased by 73%,
or $22,000, to $8,000 in the third quarter of 1999 from $30,000 in the third
quarter of 1998, as a result of a decrease in emphasis on this revenue stream
and an increased focus on the Company's merchandising strategies.
Cost of revenues: Cost of revenues consists of the cost of products sold to
customers and shipping costs. Costs of revenues increased by 408%, or
$1,468,000, to $1,828,000 in the third quarter of 1999 from $360,000 in the
third quarter of 1998. Gross profit margins were 34% in the third quarter of
1999 compared to 28% in the third quarter of 1998. The increase in gross margin
is the result of improvements in merchandise mix and pricing, and shipping
costs, offset by additional inventory allowances taken to reflect anticipated
future markdowns on closeout and auction related merchandise.
Sales and marketing: Sales and marketing primarily consists of advertising,
fulfillment, promotional costs and related payroll expenses. Sales and marketing
increased by 54%, or $286,000, to $812,000 in the third quarter of 1999 from
$526,000 in the third quarter of 1998. As a percentage of total revenues, Sales
and marketing was 29% in the third quarter of 1999 versus 105% in the third
quarter of 1998. This reflects the Company's strategy to optimize the
effectiveness of its marketing campaigns by regularly evaluating the return on
investment on marketing dollars spent versus increased customer traffic and
revenues. As a result of this ongoing evaluation, effective June 30, 1999 the
Company terminated its two-year agreement with Excite. The Company intends to
continue to evaluate new and existing marketing relationships in this manner and
may as a result increase or decrease its operating expenses to fund marketing
and advertising expenditures and to establish strategic relationships which
satisfy this evaluation and which are considered important to the success of the
Company. The Company expects to increase such advertising and marketing
expenditures significantly in the fourth quarter of 1999.
9
<PAGE>
General and administrative: General and administrative expenses consist
primarily of payroll and payroll related expenses for administrative,
information technology, accounting, and management personnel, recruiting, legal
fees, and general corporate expenses. General and administrative expenses
increased by 62%, or $605,000 to $1,584,000 in the third quarter of 1999 from
$979,000 in the third quarter of 1998. The increase is primarily attributable to
increased payroll related expenses, recruiting, legal, and general corporate
expenses to support the Company's increased infrastructure. As a percentage of
total revenues, general and administrative expenses decreased to 57% in the
third quarter of 1999 from 196% in the third quarter of 1998.
Amortization of goodwill and other merger and acquisition related costs:
Amortization of goodwill and other merger and acquisition related costs consist
primarily of goodwill associated with the purchase of Magellan.
Interest income, net: Interest income decreased $197,000 to $15,000 in the third
quarter of 1999 from $212,000 in the third quarter of 1998. The decrease is
primarily the result of a decrease in average cash and cash equivalents to
$1,718,000 during the third quarter of 1999 as compared to $15,646,000 during
the third quarter of 1998.
Minority interest: Minority interest represents Tops' 49% interest in the losses
of the joint venture, electronics.net, which is 51% owned by the Company and
accounted for as a subsidiary in its consolidated financial statements.
Net loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $2,162,000 during the third quarter of 1999 compared
with a net loss of $1,153,000 during the third quarter of 1998. During the third
quarter, the net loss per common share, basic and diluted was ($0.25) per share
compared with a net loss of $(0.15) per share during the third quarter of 1998.
Pro forma results, reflecting the exclusion of amortization of goodwill and
other merger and acquisition related costs are as follows:
Three Months Three Months
Ended, Ended,
September 30, September 30,
1999 1998
------------- -------------
Pro forma net loss $ (1,412,000) $ (1,153,000)
Pro forma net loss per share, basic and diluted $ (0.16) $ (0.15)
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
10
<PAGE>
Nine Months Ended September 30, 1999 compared to Nine Months Ended September 30,
1998.
Revenues: Total revenues increased 298% during the nine months ended September
30, 1999, or $4,438,000, to $5,930,000 as compared to $1,492,000 during the
first nine months of 1998. This increase was primarily attributable to greater
marketing efforts, an expanded customer base, repeat purchases from existing
customers and strong sales of four products, which represented approximately 42%
of total revenues for the nine months ended September 30, 1999. Advertising and
set-up fees decreased by 57%, or $52,000, to $40,000 during the first nine
months of 1999 from $92,000 during the first nine months of 1998, as a result of
a decrease in emphasis on this revenue stream and an increased focus on the
Company's merchandising strategies.
Cost of revenues: Costs of revenues increased by 299%, or $3,150,000, to
$4,205,000 during the first nine months of 1999 from $1,055,000 during the first
nine months of 1998. Gross profit margins remained unchanged at 29% for both the
first nine months of 1999 and 1998. Gross profit margins have steadily improved
throughout the first three quarters of 1999, beginning at 14% in the first
quarter, rising to 30% in the second quarter and ending at 34% in the third
quarter. This trend is primarily the result of improving merchandise mix and
pricing resulting in a greater proportion of higher margin products, as well as
a proportional decrease in shipping costs.
Sales and marketing: Sales and marketing increased by 14%, or $269,000, to
$2,268,000 during the first nine months of 1999 from $1,999,000 during the first
nine months of 1998. As a percentage of total revenues, sales and marketing
expenses decreased to 38% during the first nine months of 1999 from 134% during
the first nine months of 1998, reflecting the Company's strategy of continuously
evaluating the productivity and return on investment of its marketing
expenditures. The Company expects to increase such advertising and marketing
expenditures significantly in the fourth quarter of 1999.
General and administrative: General and administrative expenses increased by
94%, or $2,321,000 to $4,804,000 during the first nine months of 1999 from
$2,483,000 during the first nine months of 1998. The increase is primarily
attributable to increased payroll related expenses, recruiting, legal and
general corporate expenses to support the Company's increased infrastructure
Amortization of goodwill and other merger and acquisition related costs:
Amortization of goodwill and other merger and acquisition related costs consist
primarily of goodwill associated with the purchase of Magellan.
Interest income, net: Interest income decreased $231,000 to $230,000 during the
first nine months of 1999 from $461,000 during the first nine months of 1998.
The decrease is primarily the result of a decrease in average cash and cash
equivalents to $6,599,000 during the first nine months of 1999 as compared to
$12,691,000 during the first nine months of 1998.
Minority interest: Minority interest represents Tops' 49% interest in the losses
of the joint venture, electronics.net, which is 51% owned by the Company and
accounted for as a subsidiary in its consolidated financial statements.
11
<PAGE>
Net loss: As a result of the factors discussed above, the Company reported a
consolidated net loss of $5,873,000 for the nine months ended September 30, 1999
as compared with a net loss of $3,584,000 during the first nine months of 1998.
During the first nine months of 1999, the net loss per common share, basic and
diluted was ($0.73) per share compared with a net loss of $(0.56) per share
during the third quarter of 1998.
Pro forma results, reflecting the exclusion of amortization of goodwill and
other merger and acquisition related costs are as follows:
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998
------------- ------------
Pro forma net loss $ (4,864,000) $ (3,584,000)
Pro forma net loss per share, basic and diluted $ (0.61) $ (0.56)
The Company expects that it will continue to incur net losses and generate
negative cash flow from operations for the foreseeable future as it continues to
develop its business and no assurance can be given as to when, if at all, the
Company will achieve profitability.
12
<PAGE>
Liquidity and Capital Resources
On September 30, 1999 the Company completed a private placement of equity
securities raising gross proceeds of $5.1 million. The financing involved the
issuance of 784,616 shares of common stock at $6.50 per share and warrants to
purchase an aggregate of 156,922 shares of common stock at an exercise price of
$7.50 per share. The sale price of the Company's common stock and the exercise
price of the warrants issued in the private placement were both higher than the
last reported sale price of $5.81 on the Nasdaq National Market on September 30,
1999. As part of the financing another class of warrants was issued. These
warrants provide the investors with the right to receive additional shares if
the price of the Company's stock trades below certain levels. During each of
three consecutive 22 business day periods, after the effective date of a
registration statement filed with the SEC, a formula is applied to one-third of
the shares sold. That formula is based on determining the average of the twelve
lowest closing bid prices in the 22 business day period. This average lowest bid
price is divided into a number equal to one-third of the shares sold multiplied
by the difference between $7.56 and the average lowest bid price. If the average
lowest bid price is higher than $7.56 no additional shares will be issued. If
the average lowest bid price is less than $5.00 the Company has the option to
pay the cash economic equivalent instead of issuing shares. The Company agreed
to register with the SEC, at the Company's expense, on a Form S-3, the resale of
the 784,616 shares sold in addition to the shares underlying the warrants. None
of the investors, together with any affiliate thereof, may beneficially own
shares in excess of 4.999% of the outstanding shares of common stock following
such conversion. Such restrictions may be waived by each selling stockholder as
to itself upon not less than 61 days' notice to the company. The Company is
obligated to use its best efforts to keep the Form S-3 effective for up to two
years. The Company will incur substantial penalties if it fails to meet these
obligations.
Net cash used in operations increased $1,912,000 to $4,934,000 during the
first nine months of 1999 from $3,022,000 during the first nine months of 1998.
The net use of cash in operations in the current period is primarily attributed
to current period net losses of $5,873,000. Increases in inventories and
accounts receivable totaling $1,130,000 were largely offset by increases in
accounts payable and accrued liabilities totaling $817,000, during the first
nine months of 1999. Inventories increased $517,000 as the Company continued
stocking is new distribution and fulfillment center and began preparing for the
fourth quarter holiday selling season. Accounts receivable increased $613,000
reflecting both the significant period over period sales increase as well as the
effect of a customer installment payment plan on one of the Company's most
significant products. The increase in accounts payable and accrued liabilities
reflects the increase in inventory as well as an increased focus on cash
management.
Net cash used in investing activities during the first nine months of 1999
was $7,096,000 as compared to $1,960,000 in the same period of the prior year.
The current periods use of cash was primarily for two purposes. The first
consisted of $438,000 in purchases of property and equipment, primarily for
computer equipment and software to support the Company's expansion and increased
infrastructure. The second consisted of $6,658,000 related to business
acquisitions, primarily Magellan, $361,000 of which relates to earn-out payments
paid to the former shareholders of Magellan during the third quarter of 1999.
Earn-out payments are required to be paid to these former shareholders, as part
of the purchase agreement, based upon the profitability of a particular product.
As of September 30, 1999 $102,000 in earn-out payments are due to be paid in the
fourth quarter of 1999 to these former shareholders, and are reflected in the
accompanying consolidated balance sheets as Acquisition related payable.
13
<PAGE>
On March 26, 1998, the Company completed its initial public offering
("IPO") of 3,220,000 shares of Common Stock at a price of $6.50 per share. Net
proceeds from the IPO, net of underwriting discounts and offering costs, were
$18,749,000. Prior to the IPO, the Company had financed its operations primarily
from capital contributions from private investors. At September 30, 1999, the
Company had cash and cash equivalents of $5,714,000, positive working capital of
$2,945,000, stockholders' equity of $18,736,000 and no debt. The Company
believes that its existing capital resources will enable it to maintain its
operations at existing levels at least through the first quarter of 2000. The
Company also has the option available to it, through the mutual agreement of the
Company and the investors in the September 30, 1999 private placement, to raise
an additional $9.9 million of equity financing. The Company is also considering
additional debt and/or equity financing through a public offering or other
private placements. There can be no assurance that any additional financing or
other sources of capital will be available to the Company upon acceptable terms,
if at all. The inability to obtain additional financing, when needed, would have
a material adverse effect on the Company's business, financial condition and
operating results, its ability to continue operating at existing levels, and
significantly slow the pace of both customer and revenue growth.
Subsequent event
In October 1999 Tops Appliance City, Inc. (TOPS), the Company's joint
venture partner in electronics.net LLC, announced that it was discontinuing the
sale of consumer electronics products. The products which are currently offered
by electronics.net are obtained from TOPS. We believe that electronics.net will
have sufficient inventory available to it from TOPS to fulfill customer orders
over the near term, however, the Company is currently considering long term
alternatives for electronics.net including alternative supplier arrangements.
14
<PAGE>
Year 2000
The Company believes that its computer systems and software products are
fully year 2000 compliant. However, it is possible that certain computer systems
or software products of the Company's suppliers or customers may not accept
input of, store, manipulate and output dates in the year 2000 or thereafter
without error or interruption. The Company is querying its current suppliers as
to their progress in identifying and addressing problems that their computer
systems will face in correctly processing date information as the year 2000
approaches. However, there can be no assurance that all date-handling problems
of its suppliers will be identified by the Company or its suppliers in advance
of their occurrence, or that the Company or the suppliers will be able to
successfully remedy problems that are discovered. In the event that problems are
discovered with its current suppliers which cannot be remedied the Company
intends to seek alternative suppliers who are fully year 2000 compatible. The
Company believes that most of its current customers who access its website are
using software that is fully year 2000 compatible. The Company may, however, be
required to make significant expenditures to address or remedy any year 2000
problems of its customers or vendors which are not identified in advance, or to
satisfy liabilities to which the Company may become subject as a result of such
problems.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds:
On March 20, 1998 the Company's Registration Statement on Form S-1 (File
No. 333-42707) was declared effective by the Securities and Exchange Commission.
Pursuant to the Registration Statement the Company registered and sold 3,220,000
shares of Common Stock at a price of $6.50 per share. The managing underwriters
were C.E. Unterberg, Towbin and Fahnestock & Co. Inc. The aggregate price of the
amount offered and sold was $20,930,000.
The net offering proceeds to the Company after deducting underwriting
discounts and commissions and other expenses was $18,749,000.
From the effective date of the Registration Statement through September
30, 1999 the Company used the following amounts from the net offering proceeds
for the purposes set forth below:
Construction of plant $ --
Building, facilities and leasehold improvements $ 349,000
Purchase and installation of machinery, equipment and software $ 1,999,000
Purchase of real estate $ --
Acquisitions of other businesses $ 6,658,000
Repayment of indebtedness $ 500,000
Working capital $ 9,243,000
Temporary investments $ --
Acquisitions of other businesses relates primarily to the June 1, 1999
acquisition of The Magellan Group, Inc. ("Magellan"). Pursuant to this
acquisition $2,740,000 has been paid to one of the two former shareholders of
Magellan who is also currently a director of the Company.
The use of proceeds set forth above does not represent a material change
in the use of proceeds described in the Registration Statement.
On September 30, 1999 the Company completed a private placement of equity
securities raising gross proceeds of $5.1 million. The financing involved the
issuance of 784,616 shares of common stock at $6.50 per share and warrants to
purchase an aggregate of 156,922 shares of common stock at an exercise price of
$7.50 per share. As part of the financing another class of warrants was issued.
These warrants provide the investors with the right to receive additional shares
if the price of the Company's stock trades below certain levels.
16
<PAGE>
Changes in Securities
Increase in Authorized Shares: At the Company's Annual Meeting of Stockholders
held on June 3, 1999 the Company's shareholders approved an amendment to the
Company's Amended Certificate of Incorporation to increase the number of shares
of Common Stock, par value $.001 per share, that the Company is authorized to
issue from 25,000,000 to 75,000,000. The additional authorized shares will
provide the Company with flexibility in connection with possible future stock
splits, equity financings, joint ventures and acquisitions, in raising
additional capital, for grants and as incentives to employees, officers,
directors and consultants of the Company, and other general corporate purposes.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. The following is a list of exhibits filed as part of this Form 10-Q:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession: None
3. Articles of Incorporation:
3.1 Certificate of Incorporation, as amended and as currently in effect
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-42707).
3.2 Certificate of Amendment of The Certificate of Incorporation of
Cybershop International, Inc. (Incorporated by reference to Exhibit
3.2 of the Registrant's Report on Form 10Q for the fiscal quarter
ended June 30, 1999. File No. 000-23901)
By-Laws:
3.3 By-Laws as currently in effect (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No.
333-42707).
4. Instruments defining the rights of security holders, including debentures:
4.1 Form of Warrant dated September 30, 1999 issued to Strong River
Investments, Inc. and Montrose Investments L.P. (Incorporated by
reference to Exhibit 4 D to the Company's Registration Statement on
Post Effective Amendment on Form S-3. File No. 333-75507).
4.2 Form of Warrant dated September 30, 1999 issued to Strong River
Investments, Inc. and Montrose Investments L.P. (Incorporated by
reference to Exhibit 4 E to the Company's Registration Statement on
Post Effective Amendment on Form S-3. File No. 333-75507).
10. Material Contracts:
10.1 Agreement and Plan of Merger by and among Cybershop International,
Inc., MG Acquisition Corp., The Magellan Group, Inc., Ian S.
Phillips and Howard J. Kuntz III dated as of June 1, 1999
(incorporated by reference to Exhibit 2.1 of the Registrant's
Current Report on Form 8-K. File No. 0-23901)
10.2 Employment Agreement dated June 1, 1999, by and between Ian S.
Phillips and MG Acquisition Corp which is a wholly owned subsidiary
of Cybershop International, Inc. (Incorporated by reference to
Exhibit 10.2 of the Registrant's Report on Form 10Q for the fiscal
quarter ended June 30, 1999. File No. 000-23901)
10.3 Employment Agreement dated June 1, 1999, by and between Howard J.
Kuntz III and MG Acquisition Corp which is a wholly owned subsidiary
of Cybershop International, Inc. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Report on Form 10Q for the fiscal
quarter ended June 30, 1999. File No. 000-23901)
18
<PAGE>
10.4 Securities Purchase Agreement dated September 30, 1999 among
Cybershop.com, Inc., Strong River Investments, Inc. and Montrose
Investments, L.P. (Filed herewith).
10.5 Registration Rights Agreement dated September 30, 1999 among
Cybershop.com, Inc., Strong River Investments, Inc. and Montrose
Investments, L.P. (Filed herewith).
11. Statement re computation of per share earnings: Statement regarding
computation of per share earnings is not required because the computation
can be readily determined from the material contained in the financial
statements included herein.
15. Letter re unaudited financial information: None
16. Letter re change in accounting principles: None
19. Report furnished to security holders: None
22. Published report regarding matters submitted to vote of security holders:
None
23. Consents of Experts and Counsel: None
24. Power of Attorney: None
27. Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only (Filed herewith).
99. Additional Exhibits: None
b. Reports on Form 8-K, 1999: None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 12, 1999 By: /s/ Jeffrey S. Tauber
Jeffrey S. Tauber
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 12, 1999 By: /s/Jeffrey A. Leist
Jeffrey A. Leist
Senior Vice President and Chief Operating
and Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
Exhibit Index
10.4 Securities Purchase Agreement dated September 30, 1999 among
Cybershop.com, Inc., Strong River Investments, Inc. and Montrose
Investments, L.P. (Filed herewith).
10.5 Registration Rights Agreement dated September 30, 1999 among
Cybershop.com, Inc., Strong River Investments, Inc. and Montrose
Investments, L.P. (Filed herewith).
27 Financial Data Schedule.
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
Between
CYBERSHOP.COM, INC.
and
THE INVESTORS SIGNATORY HERETO
Dated as of September 30, 1999
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 10.4
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of September
30, 1999, among Cybershop.Com, Inc., a Delaware corporation (the "Company"), and
the investors signatory hereto on the date hereof (each such investor is a
"Purchaser" and all such investors are, collectively, the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers,
severally and not jointly, desire to purchase from the Company, shares of the
Company's common stock, $.001 par value per share (the "Common Stock"), and
certain other securities of the Company as more fully described in this
Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy are hereby acknowledged, the Company and the Purchasers agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers shall purchase an aggregate of 784,616 shares of Common Stock (the
"Shares") for an aggregate purchase price of $5,100,000. The closing of the
purchase and sale of the Shares (the "Closing") shall take place at the offices
of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290
Avenue of the Americas, New York, New York 10104, immediately following the
execution hereof or such later date as the parties shall agree. The date of the
Closing is hereinafter referred to as the "Closing Date."
(ii) At the Closing, the parties shall deliver or shall cause
to be delivered the following: (A) the Company shall deliver to each Purchaser
(1) a stock certificate representing the number of Shares indicated below such
Purchaser's name on the signature page of this Agreement, registered in the name
of such Purchaser, (2) a Common Stock purchase warrant, in the form of Exhibit
A, registered in the name of such Purchaser, pursuant to which such Purchaser
shall have the right to acquire shares of Common Stock upon the terms and in
such number as set forth therein (each an "Adjustable Warrant"), (3) a Common
Stock purchase warrant, in the form of Exhibit B, registered in the name of such
Purchaser, pursuant to which such Purchaser shall have the right to acquire the
number of shares of Common Stock indicated below such Purchaser's name on the
signature page of this Agreement, upon the terms set forth therein, at an
exercise price per share (subject to adjustment as provided therein) of $7.50
(each, a "Closing Warrant" and together with the Adjustable Warrants, the
"Warrants"), (4) the legal opinion of Davis & Gilbert LLP, outside counsel to
the Company, substantially in the form of Exhibit C, and (5) all other
documents, instruments and writings required to be delivered at or prior to the
Closing by the Company pursuant to this Agreement, including an executed
Registration Rights Agreement, dated the date hereof, among the Company and the
Purchasers, in the form of Exhibit D (the "Registration Rights Agreement"), and
the Transfer Agent Instructions, in the form of Exhibit E, delivered to and
acknowledged by the Company's transfer agent (the "Transfer Agent
Instructions"); and (B) each Purchaser shall deliver to the Company (1) the
purchase price indicated below such Purchaser's name on the signature page to
this Agreement in United States dollars in immediately available funds by wire
transfer to an account designated for such purpose prior to the Closing Date in
writing by the
<PAGE>
Company, and (2) all documents, instruments and writings required to have been
delivered at or prior to the Closing Date by such Purchaser pursuant to this
Agreement, including an executed Registration Rights Agreement.
1.2 Certain Defined Terms. For purposes of this
Agreement,"Trading Day" and "Per Share Market Value" shall have the meanings set
forth in Exhibit A and "Business Day" shall mean any day except Saturday, Sunday
and any day which shall be a federal legal holiday or a day on which banking
institutions in the State of New York generally are authorized or required by
law or other governmental action to close. A "Person" means an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Purchasers:
(a) Organization and Qualification. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in Schedule
2.1(a) (collectively, the "Subsidiaries"). Each of the Subsidiaries is an
entity, duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation or organization (as applicable), with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, (x) adversely
affect the legality, validity or enforceability of the Securities (as defined
below) or any of this Agreement, the Registration Rights Agreement, the Transfer
Agent Instructions or the Warrants (collectively, the "Transaction Documents"),
(y) have or result in a material adverse effect on the results of operations,
assets, prospects, or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to
perform fully on a timely basis its obligations under any of the Transaction
Documents (any of (x), (y) or (z), a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents has been duly executed by the Company and, when
delivered in accordance with the terms hereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective articles of incorporation, by-laws or other
charter or organizational documents.
<PAGE>
(c) Capitalization. The number of authorized, issued and outstanding
capital stock of the Company is set forth in Schedule 2.1(c). Except as
disclosed in Schedule 2.1(c), the Company owns all of the capital stock of each
Subsidiary. Except as disclosed in Schedule 2.1(c), no securities of the Company
or any Subsidiary are entitled to preemptive or similar rights, nor is any
holder of securities of the Company or any Subsidiary entitled to preemptive or
similar rights arising out of any agreement or understanding with the Company or
any Subsidiary by virtue of any of the Transaction Documents. Except as
disclosed in Schedule 2.1(c), there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, except as a result of the purchase and sale of the
Securities, or rights or obligations convertible into or exchangeable for, or
giving any Person (as defined below) any right to subscribe for or acquire, any
shares of Common Stock, or contracts, commitments, understandings, or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Reports (as defined below) or
Schedule 2.1(c), no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), or has the right to acquire by
agreement with or by obligation binding upon the Company, beneficial ownership
of in excess of 5% of the Common Stock..
(d) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the terms hereof and the
Warrants, shall have been duly and validly issued, fully paid and nonassessable,
free and clear of all liens, encumbrances and rights of first refusal of any
kind (collectively, "Liens"). The Company has reserved a number of duly
authorized number of shares of Common Stock for issuance hereunder upon exercise
of the Warrants that is not less than the sum of (i) the aggregate number of
Shares to be issued hereunder; (ii) the maximum number of Underlying Shares (as
defined below) issuable upon exercise of the Adjustable Warrants, assuming that
the Per Share Market Value utilized to determine the number of such Underlying
Shares is 50% of the average Per Share Market Value on the Trading Day
immediately preceding the Closing Date; and (iii) the number of Underlying
Shares issuable upon exercise in full of the Closing Warrants (such number of
shares of Common Stock as contemplated in clauses (i), (ii) and (iii), the
"Initial Minimum"). The shares of Common Stock issuable upon exercise of the
Warrants are referred to herein as the "Underlying Shares." The Shares, the
Warrants and the Underlying Shares are collectively referred to herein as, the
"Securities."
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company's or any Subsidiary's articles of
incorporation, bylaws or other charter documents (each as amended through the
date hereof), or (ii) subject to obtaining the Required Approvals (as defined
below), and except as set forth in Schedule 2.1(e), conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), as could not, individually
or in the aggregate, have or result in a Material Adverse Effect. The business
of the Company is not being conducted in violation of
<PAGE>
any law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, could not have or result in
a Material Adverse Effect.
(f) Filings, Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filings required pursuant to Section
3.11, (ii) the filing with the Securities and Exchange Commission (the
"Commission") of a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale of the Shares and the
Underlying Shares by the Purchasers (the "Underlying Shares Registration
Statement"), (iii) the application(s) to the Nasdaq National Market ("NASDAQ")
for the listing of the Shares and the Underlying Shares with the NASDAQ (and
with any other national securities exchange of market in which the Common Stock
is then listed) in the time and manner required thereby , (vi) applicable Blue
Sky filings, and (v) in all other cases where the failure to obtain such
consent, waiver, authorization or order, or to give such notice or make such
filing or registration could not have or result in, individually or in the
aggregate, a Material Adverse Effect (the items described in clauses (i)-(vi)
are collectively, the "Required Approvals").
(g) Litigation; Proceedings. Except as specified in the SEC Reports,
there is no action, suit, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries or any of their respective properties before
or by any court, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, individually or in the aggregate,
have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is in violation of any statute, rule or regulation of any governmental
authority, except as could not individually or in the aggregate, have or result
in a Material Adverse Effect.
(i) Private Offering. Assuming the accuracy of the representations
and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on its
behalf has taken or is, to the knowledge of the Company, contemplating taking
any action which could subject the offering, issuance or sale of the Securities
to the registration requirements of the Securities Act including soliciting any
offer to buy or sell the Securities by means of any form of general solicitation
or advertising.
(j) SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by it under the Securities Act of 1933, as amended
(the "Securities Act"), and the Exchange Act for the two years preceding the
date hereof (or such shorter period as the Company was required by law to file
such material) (the foregoing materials being collectively referred to herein as
the "SEC Reports" and, together with the Schedules to this Agreement the
"Disclosure Materials") on a timely
<PAGE>
basis or has received a valid extension of such time of filing and has filed any
such SEC Reports prior to the expiration of any such extension. As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. All material agreements to which the Company is
a party or to which the property or assets of the Company are subject have been
filed as exhibits to the SEC Reports. The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved ("GAAP"), except as
may be otherwise specified in such financial statements or the notes thereto,
and fairly present in all material respects the financial position of the
Company and its consolidated subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject, in
the case of unaudited statements, to normal, immaterial, year-end audit
adjustments. Since June 30,1999, except as specifically disclosed in the SEC
Reports, (a) there has been no event, occurrence or development that has or that
could result in a Material Adverse Effect, (b) the Company has not incurred any
liabilities (contingent or otherwise) other than (x) liabilities incurred in the
ordinary course of business consistent with past practice and (y) liabilities
not required to be reflected in the Company's financial statements pursuant to
GAAP or required to be disclosed in filings made with the Commission, (c) the
Company has not altered its method of accounting or the identity of its auditors
and (d) the Company has not declared or made any payment or distribution of cash
or other property to its stockholders or officers or directors (other than in
compliance with existing Company stock or stock option plans) with respect to
its capital stock, or purchased, redeemed (or made any agreements to purchase or
redeem) any shares of its capital stock.
(k) Investment Company. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees. No fees or commissions will be payable by the
Company to any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other person, with respect to the transactions
contemplated by this Agreement. The Purchasers shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by this Agreement. The Company
shall indemnify and hold harmless the Purchasers, their employees, officers,
directors, agents, and partners, and its respective Affiliates, from and against
all claims, losses, damages, costs (including the costs of preparation and
attorney's fees) and expenses suffered in respect of any such claimed or
existing fees, as such fees and expenses are incurred.
(m) Form S-3 Eligibility. The Company is eligible to register its
Common Stock for resale under Form S-3 promulgated under the Securities Act.
(n) Listing and Maintenance Requirements. The Company has not, in
the two years preceding the date hereof, except for notice sent by NASDAQ to the
Company in error, received notice (written or oral) from the NASDAQ or any other
stock exchange, market or trading facility on which the Common Stock is or has
been listed (or on which it has been quoted) to the effect that the Company is
not in compliance with the listing or maintenance requirements of such exchange,
market or trading
<PAGE>
facility. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.
(o) Patents and Trademarks. The Company and its Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and rights
(collectively, the "Intellectual Property Rights") which are necessary or
material for use in connection with their respective business as described in
the SEC Reports and as contemplated to be conducted, and which the failure to so
have would have a Material Adverse Effect. Neither the Company nor any
Subsidiary has received a written notice that the Intellectual Property Rights
used by the Company or its Subsidiaries violates or infringes upon the rights of
any Person, to the best knowledge of the Company. All such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.
(p) Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Reports, except where the failure to possess
such permits could not, individually or in the aggregate, have or result in a
Material Adverse Effect ("Material Permits"), and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(q) Title. Except as set forth in Schedule 2.1(q), the Company and
the Subsidiaries have good and marketable title in fee simple to all real
property and personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all Liens,
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and its Subsidiaries. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.
(r) Disclosure. The Company confirms that neither it nor any Person
acting on its behalf has provided the Purchasers or their agents or counsel with
any information that constitutes or might constitute material non-public
information. The Company understands and confirms that the Purchasers shall be
relying on the foregoing representations in effecting transactions in securities
of the Company. All disclosure provided to the Purchasers regarding the Company,
its business and the transactions contemplated hereby, including the Schedules
to this Agreement, furnished by or on behalf of the Company are true and correct
and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein not
misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby for itself and for no other Purchaser, represents and warrants to the
Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations thereunder. The purchase by such Purchaser of the Securities
hereunder has been duly authorized by all necessary action on the part of such
Purchaser. Each of this Agreement and the Registration Rights Agreement has been
duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms
<PAGE>
hereof, will constitute the valid and legally binding obligation of such
Purchaser, enforceable against it in accordance with its terms.
(b) Investment Intent. Such Purchaser is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser's right, subject to the provisions of this
Agreement and the Registration Rights Agreement, at all times to sell or
otherwise dispose of all or any part of such Securities pursuant to an effective
registration statement under the Securities Act and in compliance with
applicable federal and state securities laws or under an exemption from such
registration. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any amount of time.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and at each exercise date
under the Warrants, it will be, an "accredited investor" as defined in Rule
501(a)(8) under the Securities Act.
(d) Experience of such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such Purchaser
is able to bear the economic risk of an investment in the Securities and, at the
present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment. Neither such
inquiries nor any other investigation conducted by or on behalf of any Purchaser
or its representatives or counsel shall modify, amend or affect a Purchaser's
right to rely on the truth, accuracy and completeness of the Disclosure
Materials and the Company's representations and warranties contained in the
Transaction Documents.
(g) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) Reliance. Such Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
<PAGE>
The Company acknowledges and agrees that no Purchaser makes or has
made representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act, and in compliance with any
applicable federal and state securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement or to the
Company, except as otherwise set forth herein, the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected by
the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration under the Securities Act. Notwithstanding the foregoing, the
Company, without requiring a legal opinion as described in the immediately
preceding sentence, hereby consents to and agrees to register on the books of
the Company and with any transfer agent for the securities of the Company any
transfer of Securities by a Purchaser to an Affiliate of such Purchaser or to
one or more funds or managed accounts under common management with such
Purchaser, and any transfer among any such Affiliates or one or more funds or
managed accounts, provided that the transferee certifies to the Company that it
is an "accredited investor" within the meaning of Rule 501(a) under the
Securities Act and that it is acquiring the Securities solely for investment
purposes (subject to the qualifications hereof). Any such transferee shall agree
in writing to be bound by the terms of this Agreement and shall have the rights
of the Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Neither Shares nor Underlying Shares shall not contain the legend
set forth above nor any other legend at any time while an Underlying Shares
Registration Statement is effective under the Securities Act or, in the event
there is not an effective Registration Statement at such time if such legend is
not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue the legal opinion
included in the Transfer Agent Instructions to the Company's transfer agent on
the day that such Registration Statement is declared effective by the
Commission. The Company agrees that if any Shares or Underlying Shares are
issued with a legend in accordance with this Section 3.1(b), it will, within
three (3) Trading Days after request therefor by a Purchaser and the surrender
by such Purchaser of the certificate representing the applicable Shares or
Underlying Shares, provide such Purchaser with a
<PAGE>
certificate or certificates representing such Shares or Underlying Shares, free
from such legend at such time as such legend would not have been required under
this Section 3.1(b) had such issuance occurred on the date of such request. The
Company may not make any notation on its records or give instructions to any
transfer agent of the Company which enlarge the restrictions of transfer set
forth in this Section.
3.2 Acknowledgment of Dilution. The Company acknowledges that the issuance
of Underlying Shares upon exercise of the Warrants will result in dilution of
the outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligation
to issue Underlying Shares upon exercise of the Warrants pursuant to the terms
thereof is unconditional and absolute regardless of the effect of any such
dilution.
3.3 Furnishing of Information. As long as the Purchasers own Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. So long as the
Purchasers own Securities, if the Company is not required to file reports
pursuant to such laws, it will prepare and furnish to the Purchasers and make
publicly available in accordance with Rule 144(c) promulgated under the
Securities Act such information as is required for the Purchasers to sell the
Securities under Rule 144 promulgated under the Securities Act. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time
to enable such Person to sell Underlying Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including the legal opinion referenced
above in this Section. Upon the request of any such Person, the Company shall
deliver to such Person a written certification of a duly authorized officer as
to whether it has complied with such requirements.
3.4 Integration. The Company shall not, and shall use its best efforts to
ensure that, no Affiliate shall, sell, offer for sale or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in Section 2 of
the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of the Nasdaq Stock Market.
3.5 Increase in Authorized Shares. If on any date the Company would be, if
a notice of exercise were to be delivered on such date, precluded from issuing
200% of the number of Underlying Shares as would then be issuable upon exercise
in full of the Adjustable Warrants (the "Current Required Minimum") due to the
unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, within 30 Business Days from such date) prepare and
mail to the stockholders of the Company proxy materials requesting authorization
to amend the Company's articles of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least such
number of shares as is reasonably adequate to enable the Company to comply with
its issuance, exercise and reservation of shares obligations as set forth in
this Agreement and the Warrants (the sum of (x) the number of shares of Common
Stock then outstanding plus all shares of Common Stock issuable upon exercise of
all outstanding options, warrants and convertible instruments other than the
Adjustable Warrants, and (y) the Current Required Minimum, shall be a reasonable
number). In connection therewith, the Board of Directors shall (a) adopt proper
resolutions authorizing such increase, (b) recommend to and otherwise use its
best efforts to promptly and duly obtain stockholder approval to carry out such
resolutions (and hold a special meeting of the stockholders no later than the
earlier to occur of the 60th day after delivery of the proxy materials relating
to such meeting and the 90th day after request by a holder of Warrants to issue
the number of Underlying Shares in accordance with the terms hereof) and (c)
within five (5)
<PAGE>
Business Days of obtaining such stockholder authorization, file an appropriate
amendment to the Company's articles of incorporation to evidence such increase.
3.6 Reservation and Listing of Underlying Shares. (a) The Company shall
(i) in the time and manner required by the NASDAQ and such other national
securities exchange or market or trading or quotation facility on which the
Common Stock is then listed for trading, prepare and file with the NASDAQ (and
such other national securities exchange or market or trading or quotation
facility on which the Common Stock is then listed for trading) an additional
shares listing application covering a number of shares of Common Stock which is
not less than the Initial Minimum, (ii) take all steps necessary to cause such
shares of Common Stock to be approved for listing in the NASDAQ (as well as on
any such other national securities exchange or market or trading or quotation
facility on which the Common Stock is then listed) as soon as possible
thereafter, and (iii) provide to the Purchasers evidence of such listing, and
the Company shall maintain the listing of its Common Stock thereon. If the
number of Underlying Shares issuable upon exercise of the then unexercised
portion of the Adjustable Warrants exceeds 85% of the number of Underlying
Shares previously listed on account thereof with NASDAQ (and any such other
required exchanges), then the Company shall take the necessary actions to
immediately list a number of Underlying Shares as equals no less than the then
Current Required Minimum with respect thereto.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon exercise in full of the Warrants in accordance with the
Warrants, in such amount as may be required to fulfill its obligations in full
under the Warrants, which reserve shall equal no less than the then Current
Required Minimum.
3.7 Exercise Procedures. The Transfer Agent Instructions and Form of
Election to Purchase under the Warrants set forth the totality of the procedures
with respect to the exercise of the Warrants, including the form of legal
opinion, if necessary, that shall be rendered to the Company's transfer agent
and such other information and instructions as may be reasonably necessary to
enable the Purchasers to exercise the Warrants.
3.8 Notice of Breaches. Each of the Company and the Purchasers shall give
prompt written notice to the other of any breach by it of any representation,
warranty or other agreement contained in any Transaction Document, as well as
any events or occurrences arising after the date hereof which would reasonably
be likely to cause any representation or warranty or other agreement of such
party, as the case may be, contained therein to be incorrect or breached as of
the Closing Date. However, no disclosure by a party pursuant to this Section
shall be deemed to cure any breach of any representation, warranty or other
agreement contained in any Transaction Document.
3.9 Right of First Refusal; Subsequent Registrations. (a) The Company
shall not, directly or indirectly, without the prior written consent of the
Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or a transaction intended to be exempt or not subject to registration
under the Securities Act (a "Subsequent Placement") until the 180th day after
the Underlying Shares Registration Statement is first declared effective by the
Commission, except (i) the granting of options or warrants to employees,
officers and directors, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereinafter duly adopted by
the Company, (ii) shares of Common Stock issuable upon exercise of currently
outstanding options and warrants and upon conversion of any currently
outstanding convertible securities of the Company, in each case to the extent
disclosed in Schedule 2.1(c) but not with respect to any amendment or
modification thereof, and (iii) shares of Common Stock issuable upon exercise of
the Warrants in
<PAGE>
accordance with the terms thereof, unless (A) the Company delivers to each
Purchaser a written notice (the "Subsequent Placement Notice") of its intention
effect such Subsequent Placement, which Subsequent Placement Notice shall
describe in reasonable detail the proposed terms of such Subsequent Placement,
the amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Placement shall be effected, and attached to which shall be a
term sheet or similar document relating thereto and (B) such Purchaser shall not
have notified the Company by 5:30 p.m. (New York City time) on the fifth (5th)
Trading Day after its receipt of the Subsequent Placement Notice of its
willingness to cause such Purchaser to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation, financing
to the Company on the same terms set forth in the Subsequent Placement Notice.
If the Purchasers shall fail to notify the Company of their intention to enter
into such negotiations within such time period, the Company may effect the
Subsequent Placement substantially upon the terms and to the Persons (or
Affiliates of such Persons) set forth in the Subsequent Placement Notice;
provided, that the Company shall provide the Purchasers with a second Subsequent
Placement Notice, and the Purchasers shall again have the right of first refusal
set forth above in this Section (a), if the Subsequent Placement subject to the
initial Subsequent Placement Notice shall not have been consummated for any
reason on the terms set forth in such Subsequent Placement Notice within thirty
(30) Trading Days after the date of the initial Subsequent Placement Notice with
the Person (or an Affiliate of such Person) identified in the Subsequent
Placement Notice. The rights of the Purchasers under this Section shall apply to
each Subsequent Placement contemplated by the Company or such Subsidiary,
regardless of any prior waivers or non-participation.
(b) Except for (w) Shares, (x) Underlying Shares, (y) other
"Registrable Securities" (as such term is defined in the Registration Rights
Agreement) to be registered, and securities of the Company as set forth in
Schedule 6(b) of the Registration's Rights Agreement to be registered, in the
Underlying Shares Registration Statement in accordance with the Registration
Rights Agreement, and (z) Common Stock permitted to be issued pursuant to
paragraph (a)(i) - (iii) of Section 3.9 (a), the Company shall not, for a period
of not less than 90 Trading Days after the date that the Underlying Shares
Registration Statement is declared effective by the Commission, without the
prior written consent of the Purchasers (i) issue or sell any of its or any of
its Affiliates' equity or equity-equivalent securities pursuant to Regulation S
promulgated under the Securities Act, or (ii) file a registration statement for
the issuance or resale of any securities of the Company. Any days that a
Purchaser is not permitted or unable to utilize the prospectus or otherwise to
sell Underlying Shares under the Underlying Shares Registration Statement shall
be added to such 90 Trading Day period for the purposes of this Section.
3.10 Certain Securities Laws Disclosures; Publicity. The Company shall:
(i) on the Closing Date, issue a press release acceptable to the Purchasers
disclosing the transactions contemplated hereby, (ii) file with the Commission a
Report on Form 8-K or Form 10-Q (as applicable) disclosing the transactions
contemplated hereby within ten (10) Business Days after the Closing Date, and
(iii) timely file with the Commission a Form D promulgated under the Securities
Act as required under Regulation D promulgated under the Securities Act and
provide a copy thereof to the Purchasers promptly after the filing thereof. The
Company shall, no less than two (2) Business Days prior to the filing of any
disclosure required by clauses (ii) and (iii) above, provide a copy thereof to
the Purchasers. The Company and the Purchasers shall consult with each other in
issuing any press releases or otherwise making public statements or filings and
other communications with the Commission or any regulatory agency or stock
market or trading facility with respect to the transactions contemplated hereby
and neither party shall issue any such press release or otherwise make any such
public statement, filings or other communications pertaining to the transactions
contemplated hereby without the prior written consent of the other, which
consent shall not be unreasonably withheld or delayed, except that no prior
consent shall be required if such disclosure is required by law and such consent
can not reasonably be expected to be received prior to the time required to
complete such filing or make such statement in accordance with such applicable
law, in which such case the disclosing party shall provide the other
<PAGE>
party with prior notice of such public statement, filing or other communication.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of a Purchaser, or include the name of a Purchaser in any filing with the
Commission, or any regulatory agency, trading facility or stock market without
the prior written consent of such Purchaser, except to the extent such
disclosure (but not any disclosure as to the controlling Persons thereof) is
required by law, in which case the Company shall provide such Purchaser with
prior notice of such disclosure.
3.11 Transfer of Intellectual Property Rights. Except in connection with
the sale of all or substantially all of the assets of the Company, the Company
shall not transfer, sell or otherwise dispose of any Intellectual Property
Rights, or allow any of the Intellectual Property Rights to become subject to
any Liens, or fail to renew such Intellectual Property Rights (if renewable and
it would otherwise lapse if not renewed).
3.12 Use of Proceeds. The Company shall use the net proceeds from the sale
of Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than trade payables in
the ordinary course of business), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation. Pending
application of the proceeds of this placement in the manner permitted hereby,
the Company will invest such proceeds in interest bearing accounts and/or
short-term, investment grade interest bearing securities.
3.13 Reimbursement. If any Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred. The reimbursement obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have,
shall extend upon the same terms and conditions to any Affiliates of the
Purchasers who are actually named in such action, proceeding or investigation,
and partners, directors, agents, employees and controlling persons (if any), as
the case may be, of the Purchasers and any such Affiliate, and shall be binding
upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company in connection with or as a result of the consummation of
the Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the applicable Purchaser or entity in connection with
the transactions contemplated by this Agreement.
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing the Company shall reimburse the
Purchasers for their legal fees and expenses incurred in connection with the
preparation and negotiation of the Transaction Documents by paying to Robinson
Silverman $25,000 for the preparation and negotiation of the Transaction
Documents. The $25,000 may be deducted from the proceeds of the Purchase Price
payable to the Company and paid directly by the Purchasers to Robinson
Silverman. Other than the amounts contemplated in the immediately preceding
sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.2 Entire Agreement; Amendments. The Transaction Documents, together with
the Exhibits and Schedules thereto contain the entire understanding of the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules.
4.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 8:00 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Agreement later than 8:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: Cybershop.Com, Inc.
116 Newark Avenue,
Jersey City, New Jersey 07302
Facsimile No.: (201) 234-5052
Attn: Chief Financial Officer
With copies to: Davis & Gilbert LLP
1740 Broadway
New York, NY 10019
Facsimile No.: (212) 468-4888
Attn: Walter M. Epstein, Esq.
If to a Purchaser: To the address set forth under such
Purchaser's name on the signature
pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be waived or
<PAGE>
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchasers or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Except as set forth in
Section 3.1(a), the Purchasers may not assign this Agreement or any of the
rights or obligations hereunder without the consent of the Company.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 Governing Law. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.9 Survival. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery and exercise of the
Warrants.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and
<PAGE>
provisions of this Agreement shall not in any way be affecting or impaired
thereby and the parties will attempt to agree upon a valid and enforceable
provision which shall be a reasonable substitute therefor, and upon so agreeing,
shall incorporate such substitute provision in this Agreement.
4.12 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchasers agree that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
4.13 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document is several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert with respect to such obligations or
the transactions contemplated by the Transaction Document. Each Purchaser shall
be entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement or out of the Transaction
Documents, and it shall not be necessary for any other Purchaser to be joined as
an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
CYBERSHOP.COM, INC..
By:
---------------------------------------
Name:
Title:
<PAGE>
STRONG RIVER INVESTMENTS, INC.
By:
---------------------------------------
Name:
Title:
Purchase Price for Common Stock
to be acquired at Closing: $2,550,000
Number of Shares to be acquired at
Closing: 392,308
Warrant Shares subject to Closing
Warrant; 78,461
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
505 Park Avenue, 19th floor
New York, NY 10022
Facsimile No.: (212) 651-9010
Attn: Avi Vigder
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and
(212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
<PAGE>
MONTROSE INVESTMENTS L.P.
By:
---------------------------------------
Name:
Title:
Purchase Price for Common Stock
to be acquired at Closing: $2,550,000
Number of Shares to be acquired at
Closing: 392,307
Warrant Shares subject to Closing
Warrant; 78,461
Address for Notice:
Montrose Investments, L.P.
300 Crescent Court, Suite 700
Dallas, TX 75201
Facsimile: (214) 758-1221
Attn: Will Rose
Kim Rozman
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and
(212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
<PAGE>
Exhibit 10.5
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of September 30, 1999,among Cybershop.com, Inc., a Delaware corporation
(the "Company"), and the investors signatory hereto (each such investor is a
"Purchaser" and all such investors are, collectively, the "Purchasers").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof, among the Company and the Purchasers (the "Purchase
Agreement").
In consideration of the mutual covenants contained in the Purchase Agreement and
in this Agreement, the Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are defined
in the Purchase Agreement shall have the meanings given such terms in the
Purchase Agreement. As used in this Agreement, the following terms shall have
the following meanings:
"Adjustable Warrants" shall have the meaning set forth in the Purchase
Agreement.
"Advice" shall have meaning set forth in Section 6(e).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
governmental action to close.
"Closing Date" shall have the meaning set forth in the Purchase Agreement.
"Closing Warrants" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, $.001 par value per share
and any other securities into which such stock shall hereafter be redistributed
or recapitalized.
<PAGE>
"Effectiveness Date" means the 60th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the 10th Business Day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registration Delay Payments" shall have the meaning set forth in Section
2(e).
"Registrable Securities" means (i) the Shares and (ii) the shares of
Common Stock issuable upon exercise of the Warrants.
"Registration Statement" means the registration statement and any
additional registration statement contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
<PAGE>
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
"Rule 424" means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Shares" means the shares of Common Stock issued to the Purchasers on the
Closing Date pursuant to the Purchase Agreement.
"Special Counsel" means one special counsel to the Holders for which the
Holders will be reimbursed by the Company pursuant to Section 4.
"Transaction Documents" shall have the meaning set forth in the Purchase
Agreement.
"Underwritten Registration or Underwritten Offering" means a registration
in connection with which securities of the Company are sold to an underwriter
for reoffering to the public pursuant to an effective registration statement.
"Vesting Date" shall have the meaning set forth in the Adjustable
Warrants.
"Warrants" means the Closing Warrants and the Adjustable Warrants.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering the resale of all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case such registration shall be on another appropriate
form in accordance herewith as the Holders may consent). The Company shall use
its best efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as possible after the filing thereof, but
in any event prior to the Effectiveness Date, and shall use its best efforts to
keep such Registration Statement continuously effective under the Securities Act
until the date which is two (2) years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144(k) as determined by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent (the "Effectiveness
Period"), provided, that the Company shall not be deemed to have used its best
efforts to keep the Registration Statement effective during the Effectiveness
Period if it voluntarily takes any action that would result in the Holders not
being able to sell the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is required under
applicable law or the Company has filed a post-effective amendment to the
Registration Statement and the Commission has not declared it effective.
<PAGE>
(b) In order to account for the fact that the number of shares of Common
Stock that are issuable upon exercise of the Adjustable Warrants is determined
in part upon the Per Share Market Value (as defined in the Adjustable Warrants)
on a Vesting Date, the initial Registration Statement to be filed hereunder
shall include (but not be limited to) a number of shares of Common Stock equal
to no less than the sum of (i) the number of shares issuable upon exercise of
the Adjustable Warrants, assuming, for the purposes of this subsection (i), that
the Adjustment Period Price (as defined in the Adjustable Warrants) on each
Vesting Date is 50% of the Per Share Market Value for the Trading Day (as
defined in the Adjustable Warrants) immediately preceding the Closing Date, (ii)
the number of shares issuable upon exercise in full of the Closing Warrant and
(iii) the number of Shares (the sum of (i), (ii) and (iii), the "Initial
Minimum").
(c) If the Holders of a majority of the Registrable Securities then
outstanding so elect, an offering of Registrable Securities pursuant to a
Registration Statement may be effected in the form of an Underwritten Offering.
In such event, and, if the managing underwriters advise the Company and such
Holders in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(d) If any of the Registrable Securities are to be sold in an Underwritten
Offering, the investment banker that will administer the offering will be
selected by the Holders of a majority of the Registrable Securities included in
such offering upon consultation with the Company. No Holder may participate in
any Underwritten Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
arrangements.
(e) If (i) the initial Registration Statement is not filed on or before
the Filing Date (if the Company files such Registration Statement without
affording the Holder the opportunity to review and comment on the same as
required by Section 3(a) hereof, the Company shall not be deemed to have
satisfied this clause (i)), or (ii) the Company fails to file with the
Commission a request to accelerate in accordance with Rule 12d1-2 promulgated
under the Exchange Act within five (5) days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed" or is not subject to further
review, or (iii) the initial Registration Statement filed hereunder is not
declared effective by the Commission on or before the Effectiveness Date, or
(iv) after a Registration Statement has been declared effective by the
Commission, such Registration Statement is either not effective as to all
Registrable Securities required to be covered thereby throughout the
Effectiveness Period or the Holders are not permitted for any reason to make
sales thereunder during such period, (v) an amendment to the Registration
Statement is not filed by the Company with the Commission within ten (10) days
of the Commission's notifying the Company that such amendment is required in
order for a Registration Statement to be declared effective, or (vi) trading in
the Common Stock shall be suspended from the NASDAQ (as defined herein) or a
Subsequent Market (as defined herein) for more than three (3) Business Days
(which need not be consecutive days) (any such failure or breach being referred
to as an "Event," and for purposes of clauses (i), (iii) and (iv) the date
<PAGE>
on which such Event occurs, or for purposes of clause (ii) the date on which
such five (5) day period is exceeded, or for purposes of clause (v) the date on
which such ten (10) day period is exceeded, or for purposes of clause (vi) the
date on which such three (3) Business Day period is exceeded being referred to
as "Event Date"), then, in any such case, as partial relief for the damages
suffered therefrom by the Holder (which remedy shall not be exclusive of any
other remedies available at law or in equity), the Company, other than with
respect to an Event caused by a failure under clause (ii) above, shall on the
Event Date and on each monthly anniversary thereof until the triggering Event is
cured, pay to the Holder an amount in cash, as liquidated damages for the
estimated cost to the Holders of not having liquid securities in the time
contemplated by the Transaction Documents and not as a penalty, equal to 2% of
the purchase price paid by such Holder for its Shares pursuant to the Purchase
Agreement. In the event that the Company fails to request that a Registration
Statement be declared effective not later than the 5th day after it is notified
by the Commission that the Registration Statement is not subject to "a review"
or no further "review", then for each day after such 5th day that the
Registration Statement has not been declared effective by the Commission, the
Company shall pay to the Holders as liquidated damages, not as a penalty, the
sum of $50,000. The payments to which the Holders shall be entitled pursuant to
this Section are referred to herein as "Registration Delay Payments."
Registration Delay Payments shall be calculated on a cumulative basis and paid
within five (5) Business Days of the Event Date and each monthly anniversary
thereof. If the Company fails to make Registration Delay Payments in a timely
manner, such Registration Delay Payments shall bear interest at the rate of 2.0%
per month (or the maximum rate permitted by law), pro-rated for partial months,
until paid in full.
3. Registration Procedures
In connection with the Company's registration obligations hereunder, the
Company shall:
(a) Prepare and file with the Commission on or prior to the Filing Date, a
Registration Statement on Form S-3 (or if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3 such registration
shall be on another appropriate form in accordance herewith, or, in connection
with an Underwritten Offering hereunder, such other form agreed to by the
Company and the Holders) which shall contain the "Plan of Distribution" attached
hereto as Annex A (except if otherwise directed by the Holders), and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
the filing of a Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to such Holders
and such underwriters, to conduct a reasonable investigation within the meaning
of the Securities Act. The Company shall not file the Registration Statement or
any such Prospectus or any amendments or supplements thereto to which the
Holders of a majority of the Registrable Securities, their Special Counsel, or
any managing underwriters, shall reasonably object on a timely basis.
<PAGE>
(b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep the Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424; (iii) respond as
promptly as reasonably possible, and in any event within ten (10) days, to any
comments received from the Commission with respect to the Registration Statement
or any amendment thereto and as promptly as reasonably possible provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange Act
with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) (i) File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement. The Company shall have twenty
(20) days to file such additional Registration Statements after its receipt of
notice of the requirement thereof which the Holders may give at any time when
the number of Registrable Securities exceeds 85% of the number of shares of
Common Stock then registered in a Registration Statement hereunder. In such
event, the Registration Statement required to be filed by the Company shall
include a number of shares of Common Stock equal to no less than the Initial
Minimum and any other Registrable Securities not then registered in a
Registration Statement.
(ii) File such supplements or attach "stickers" to the Registration
Statement or Prospectus as and when required by the Commission to evidence a
material amount of resales by a Holder pursuant to a Prospectus. In connection
therewith, if such supplements or "stickers" are periodically required by the
Commission, the Company shall, within four (4) Business Days, file such
supplements or attach such "stickers" whenever a Holder has sold 50% of the
Registrable Securities covered by the then outstanding Prospectus (as last
supplemented or "stickered") in order to cover 100% of the number of the
outstanding Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold, their Special
Counsel and any managing underwriters as promptly as reasonably possible (and,
in the case of (i)(A) below, not less than five (5) Business Days (or, in the
case of a supplement or "sticker" required to be filed or attached pursuant to
Section 3(c)(ii), within one (1) Business Day) prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders); and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the
<PAGE>
Commission of any stop order suspending the effectiveness of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event or passage of time that makes the financial statements
included in the Registration Statement ineligible for inclusion therein or any
statement made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus, as the case may be, it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) Use its best efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of (i) any order suspending the effectiveness of the Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders of a majority
in interest of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such reasonable
information as such managing underwriters and such Holders agree should be
included therein, and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that the
Company shall not be required to take any action pursuant to this Section 3(f)
that would, in the opinion of counsel for the Company, violate applicable law or
be materially detrimental to the business prospects of the Company.
(g) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(i) Prior to any public offering of Registrable Securities, use its best
efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special
<PAGE>
Counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions within the
United States as any Holder or underwriter requests in writing, to keep each
such registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by a Registration Statement; provided, however, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that would
subject it to general service of process in any such jurisdiction where it is
not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(j) Cooperate with the Holders and any managing underwriters to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be delivered to a transferee pursuant to a Registration Statement,
which certificates shall be free, to the extent permitted by the Purchase
Agreement, of all restrictive legends, and to enable such Registrable Securities
to be in such denominations and registered in such names as any such managing
underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section 3(d)(vi), as
promptly as reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(l) Use its best efforts to cause all Registrable Securities relating to
such Registration Statement to be listed on the Nasdaq National Market
("NASDAQ") or on any other stock market or trading facility on which the shares
of Common Stock are traded, listed or quoted (each a "Subsequent Market") as and
when required pursuant to the Purchase Agreement.
(m) Enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings (subject to the scheduling of appropriate
exceptions to insure such representations and warranties are accurate), and
confirm the same if and when requested; (ii) in the case of an Underwritten
Offering obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates thereof
addressed to each Holder and each such underwriter, in form, scope and substance
reasonably satisfactory to any such managing underwriters and Special Counsel to
the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement, and, in the case of an
<PAGE>
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, use its best reasonable efforts to obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to the Company in form
and substance as are customary in connection with Underwritten Offerings; (iv)
if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and holders of a majority of Registrable Securities participating in such
Underwritten Offering); and (v) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to Section 3(m)(i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
(n) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(o) Comply in all material issues with all applicable rules and
regulations of the Commission.
(p) The Company may require each selling Holder to furnish to the Company
such information regarding the distribution of such Registrable Securities and
the beneficial ownership of Common Stock held by such Holder as is required by
law to be disclosed in the Registration Statement, and the Company may exclude
from such registration the Registrable Securities of any such Holder who
unreasonably fails to furnish such information within a reasonable time after
receiving such request. If the Registration Statement refers to any Holder by
name or otherwise as the holder of any securities of the Company, then such
Holder shall have the right to require (if such reference to such Holder by name
or otherwise is not required by the Securities Act or any similar Federal
statute then in force) the deletion of the reference to such Holder in any
amendment or supplement to the Registration Statement filed or prepared
subsequent to the time that such reference ceases to be required.
<PAGE>
5. Registration Expenses
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Company, except as and to the extent specified in
Section 4(b), shall be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with the NASDAQ and any Subsequent Market on
which the Common Stock is then listed for trading, and (B) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as the managing underwriters, if any, or the Holders of a
majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any, or by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses of the Company,
(iv) fees and disbursements of counsel for the Company and Special Counsel for
the Holders at a sum not higher than $15,000, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the terms
hereof, and there shall be at such time no effective Registration Statement
meeting the requirements hereof and covering all of the Registrable Securities
pursuant to which the Holders are both named Selling Security holders thereunder
and permitted to utilize the Prospectus thereunder to resell such Registrable
Securities held by them, then the Company shall be responsible for all costs,
fees and expenses in connection therewith, except for the fees and disbursements
of the Underwriters (including any underwriting commissions and discounts) and
their legal counsel and accountants. By way of illustration which is not
intended to diminish from the provisions of Section 4(a), the Holders shall not
be responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof. However, if the
Holders require an Underwritten Offering at a time when all of the circumstances
specified in the opening clause to the first sentence of this Section 4(b) are
present, then such Holders shall bear all costs associated with such
Underwritten Offering, including those costs specified in Section 4(a) above.
4. Indemnification
<PAGE>
(a) Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents (including any underwriters retained by such Holder
in connection with the offer and sale of Registrable Securities), brokers
(including brokers who offer and sell Registrable Securities as principal as a
result of a pledge or any failure to perform under a margin call of Common
Stock), investment advisors and employees of each of them, each Person who
controls any such Holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out
of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement or approved by Special Counsel, such Prospectus or
such form of Prospectus or in any amendment or supplement thereto or (2) in the
case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
<PAGE>
(c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
<PAGE>
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
5. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specified in Schedule 6(b)
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person that have not been satisfied in full. Without limiting
the generality of the foregoing, without the written consent of the Holders of a
majority of the then outstanding Registrable Securities, the Company shall not
grant to any Person the right to request the Company to register any securities
of the Company under the Securities Act unless the rights so granted are subject
in all respects to the prior rights in full of the Holders set forth herein, and
are not otherwise in conflict or inconsistent with the provisions of this
Agreement.
<PAGE>
(c) No Piggyback on Registrations. Except as and to the extent specified
in Schedule 6(b) hereto, neither the Company nor any of its security holders
(other than the Holders in such capacity pursuant hereto) may include securities
of the Company in the Registration Statement other than the Registrable
Securities, and the Company shall not after the date hereof enter into any
agreement providing any such right to any of its security holders.
(d) Compliance. Each Holder covenants and agrees that it will comply with
the prospectus delivery requirements of the Securities Act as applicable to it
in connection with sales of Registrable Securities pursuant to the Registration
Statement.
(e) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(k), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.
(f) Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering all of the Registrable Securities then
outstanding and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder of Registrable
Securities written notice of such determination and, if within fifteen (15) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered, provided such
Registrable Securities are not freely tradable without volume restrictions under
Rule 144k.
(g) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and the
Holders of at least two-thirds of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
<PAGE>
(h) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 8:00 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in the Purchase Agreement later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: Cybershop.Com, Inc.
116 Newark Avenue,
Jersey City, New Jersey 07302
Facsimile No.: (201) 234-5052
Attn: Chief Financial Officer
With copies to: Davis & Gilbert LLP
1740 Broadway
New York, NY 10019
Facsimile No.: (212) 468-4888
Attn: Walter M. Epstein, Esq.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in
the stock transfer books of the Company or such other address as
may be designated in writing hereafter, in the same manner, by
such Person.
(i) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. The Company may not assign its
rights or obligations hereunder without the prior written consent of Holders of
a majority of Registrable Securities then outstanding. Each Holder may assign
their respective rights hereunder in the manner and to the Persons as permitted
under this Agreement and the Purchase Agreement.
(j) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(k) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or
<PAGE>
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law.
(l) Cumulative Remedies. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their reasonable efforts to find and employ an alternative means to achieve the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(n) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(o) Shares Held by the Company and its Affiliates. Whenever the consent or
approval of Holders of a specified percentage of Registrable Securities is
required hereunder, Registrable Securities held by the Company or its Affiliates
(other than any Holder or transferees or successors or assigns thereof if such
Holder is deemed to be an Affiliate solely by reason of its holdings of such
Registrable Securities) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage.
(p) Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
CYBERSHOP.COM, INC.
By:
--------------------------------
Name:
Title:
<PAGE>
STRONG RIVER INVESTMENTS, INC.
By:
--------------------------------
Name:
Title:
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
505 Park Avenue, 19th floor
New York, NY 10022
Facsimile No.: (212) 651-9010
Attn: Avi Vigder
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq. and
Eric L. Cohen, Esq.
<PAGE>
MONTROSE INVESTMENTS L.P.
By:
--------------------------------
Name:
Title:
Address for Notice:
Montrose Investments, L.P.
300 Crescent Court, Suite 700
Dallas, TX 75201
Facsimile: (214) 758-1221
Attn: Will Rose
Kim Rozman
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and
(212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
<PAGE>
Annex A
Plan of Distribution
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
<PAGE>
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,714,000
<SECURITIES> 0
<RECEIVABLES> 854,000
<ALLOWANCES> (65,000)
<INVENTORY> 1,043,000
<CURRENT-ASSETS> 8,254,000
<PP&E> 2,842,000
<DEPRECIATION> (897,000)
<TOTAL-ASSETS> 24,142,000
<CURRENT-LIABILITIES> 5,309,000
<BONDS> 0
0
0
<COMMON> 9,000
<OTHER-SE> 18,727,000
<TOTAL-LIABILITY-AND-EQUITY> 24,142,000
<SALES> 5,890,000
<TOTAL-REVENUES> 5,930,000
<CGS> 4,205,000
<TOTAL-COSTS> 4,205,000
<OTHER-EXPENSES> 8,081,000
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<INCOME-PRETAX> (5,873,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,873,000)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,873,000)
<EPS-BASIC> (0.73)
<EPS-DILUTED> (0.73)
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