<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
DIVICORE INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 77-0457660
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Mr. Francis E.J. Wilde III
Chief Executive Officer and President
Divicore Inc.
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Name address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Jonathan G. Shapiro, Esq. Gregory C. Smith, Esq.
Alan K. Tse, Esq. Michael J. Cordero, Esq.
Brian E. Covotta, Esq. Spencer G. Park
BROBECK, PHLEGER & HARRISON LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Two Embarcadero Place 525 University Ave.
2200 Geng Road Suite 220
Palo Alto, California 94303 Palo Alto, California 94301
(650) 424-0160 (650) 470-4500
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Title of Each Class Maximum Amount of
of Securities to be Registered Offering Price(1) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock $.001 par value................ $60,000,000 $ 16,680
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 28, 1999.
PRELIMINARY PROSPECTUS
Shares
[LOGO OF DIVICORE APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of our common stock.
We are selling all of the shares of common stock offered under this prospectus.
There is currently no public market for our shares. We intend to apply to have
our common stock approved for listing on the Nasdaq National Market under the
symbol "DVCR."
See "Risk Factors" beginning on page 9 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discounts and commissions........................... $ $
Proceeds, before expenses, to us................................. $ $
</TABLE>
-----------
The underwriters under certain circumstances may purchase up to an additional
shares of common stock from us at the initial public offering price
less the underwriting discount, solely to cover over-allotments.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on or about , 1999.
-----------
Bear, Stearns & Co. Inc.
SG Cowen
Volpe Brown Whelan & Company
The date of this prospectus is , 1999.
<PAGE>
Page 1 (Inside Front Cover)
An enlarged copy of the Divicore logo centered on the page, which consists
of the word "DIVICORE(TM)," with the first four letters shaded and the fifth
and sixth letters encircled by a diagonal ring. Underneath the logo are the
words "What the digital world watches." On the bottom of the page is the
address and telephone number of Divicore's headquarters.
Pages 2-3 (Gatefold)
A two page graphic across both pages of the gatefold. Across the top is the
statement "Divicore(TM) Brings It All Home." Underneath is a picture of a two
story house with shuttered windows surrounded by trees and a lawn. On the left
side of the house are the words "What do we do? We develop the digital audio
and video technologies inside the products you use every day. Whether it's
playing a new DVD, watching HDTV, recording your favorite TV program, or
sending a video of Sally's dance recital over the Internet. Our customers are
the manufacturers of your favorite name-brand personal computer and consumer
electronics products." On the right side of the picture are the words "Compaq,
Dell, Fountain, Fujitsu, Gateway, Hewlett-Packard, Micron, Packard-Bell NEC,
Tottori-Sanyo, Yamaha and others rely on us to make sure you can just sit back
and enjoy. Who are we? We're the people who bring the digital world home."
Centered below this text is the word "Divicore.(TM)" Lines are drawn from five
of the windows and the roof to pictures appearing below the house and blocks of
text appearing below these pictures.
The first window shows a line to a television set, below which appears the
text "Turning the average PC into a state-of-the-art digital VCR can become a
reality with our emerging digital video and audio encoding software
technologies." The second window shows a line to a camcorder, below which
appears the text "With our CineMaster(TM) RT Encoder software, camcorder video
can be digitized, viewed, stored and copied on a PC; and sent over the Internet
to family and friends." The third window shows a line to a personal computer,
below which appears the text "Award-winning CineMaster(TM) products bring the
theater-quality experience of DVD technology to millions of homes on personal
computers from the world's leading manufacturers." The fourth window shows a
line to a DVD player, below which appears the text "Our state-of-the-art
digital audio and video software powers brand name DVD players and other
consumer electronics appliances driving the digital home theater revolution."
The fifth window shows a line to a projection television set, below which
appears the text "Already demonstrating High Definition Television on personal
computers, we are developing the technologies that will make HDTV a cost-
effective reality in 1999." A line also runs from the roof to a satellite dish,
below which appears the text "We are demonstrating live satellite TV on a
personal computer, and we are adding full DBS viewing and recording
capabilities to our CineMaster(TM) family of software solutions."
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our consolidated financial
statements and the notes thereto before making an investment decision. Unless
otherwise indicated or required by the context, references to years in this
prospectus refer to our fiscal years. In this prospectus, Divicore, "we," "us,"
and "our" refers to Divicore Inc. but not to the underwriters listed in this
prospectus.
Divicore Inc.
We design, develop, license and market innovative core-based modular
software solutions that enable digital video and audio stream management in
personal computer systems and consumer electronics devices. We also license
supporting hardware designs to selected customers and provide customization
services and customer support. Our solutions enable decoding (playback) and
encoding (recording) of multimedia formats such as digital versatile disk, or
DVD; direct broadcast satellite, or DBS, or its European counterpart, digital
video broadcasting or DVB; and high definition television, or HDTV, on existing
personal computer and consumer electronics platforms. Our digital solutions
incorporate industry standards for video and audio compression, independent of
operating systems and silicon components, and are built using the same
powerful, easily customizable and modular software architecture. As digital
technology continues to evolve and standards change, we can add new modules to
our software to provide additional functionality without needing to alter
existing core components of our digital solution. Moreover, our modular
approach provides our customers with enhanced flexibility and adaptability that
enables the rapid introduction of new products to market. We intend to leverage
the flexibility of our products to capitalize on the shift from analog to
digital content across the media and entertainment industries.
Our products focus on two important markets, the personal computer market
and the consumer electronics market. Our products integrate the same high-
performance software architecture and code base across multiple applications in
each market. This allows personal computer and consumer electronics
manufacturers to achieve faster time-to-market, to cross-market their product
offerings, to develop a customizable, consistent look and feel across product
lines and to reduce technical support costs. Personal computer and peripherals
manufacturers currently shipping products that incorporate our technology
include ATI Technologies Inc., Compaq Computer Corporation, Dell Computer
Corporation, Fountain Technologies, Inc., Fujitsu Microelectronics, Inc.,
Gateway 2000, Inc., Hewlett-Packard Company, Micron Electronics, Inc. and
Packard Bell NEC Europe. Consumer electronics manufacturers that have agreed to
incorporate our technology include Tottori-Sanyo Electric Co., Ltd. (a
subsidiary of Sanyo Electronics Corporation, Inc.) and Yamaha Corporation of
America. We also have strategic relationships with ATI Technologies, Dolby
Laboratories, Inc., Intel Corporation and STMicroelectronics (formerly SGS-
Thomson Microelectronics).
Consumers are increasingly demanding capabilities that analog technology
cannot provide. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrum and
the ability to deliver customized and interactive services. As a result, a
growing number of consumer electronics manufacturers are using digital
technologies in their video and audio devices. Government regulation and the
expanding digital content market have accelerated this trend. As a result, all
existing television sets, video cassette recorders, stereos, set-top boxes and
personal computers are now candidates for upgrade to digital
technologies. In order to capitalize on upgrade cycles for existing products
and enter new markets, personal
3
<PAGE>
computer and consumer electronics manufacturers are seeking digital product
solutions that permit rapid time-to-market and incorporate the latest features
and functionality.
Our strategy is to be the leading global provider of digital video and audio
solutions to personal computer and consumer electronics manufacturers. We
believe that the most effective way to achieve our strategy is to license our
technology to manufacturers that will in turn use our solutions to penetrate
very large personal computer and consumer electronics markets. The key elements
of our strategy include growing our licensing business model among top tier
personal computer and consumer electronics manufacturers, extending our
technological leadership, leveraging our technology and expertise into new
markets and focusing on our strategic relationships.
We currently offer two complete solutions for DVD playback on personal
computers. These solutions are incorporated into the products of seven of the
top ten personal computer manufacturers, based on total unit sales. These
include Software CineMaster 98, a software-only solution, and Hardware
CineMaster 98, a software solution with a supporting hardware platform design.
We also offer CineMaster CE, a software solution with multiple supporting
hardware platform designs that enables DVD playback across a variety of
consumer electronics products. CineMaster CE was introduced in late 1998 and
has already achieved design wins from Sanyo Electronics and Yamaha. In
addition, we are developing a software-only DVD encoding solution that enables
the recording of video and audio streams in the DVD format, a software solution
that enables digital television viewing on a consumer electronics device and a
software solution that enables the viewing of digital cable television streams
using a personal computer or digital cable set-top device. Divicore receives a
per unit license fee from personal computer and consumer electronics devices
manufacturers that incorporate its technology in addition to any license fees
it may receive from manufacturers of semiconductors used in these devices.
----------------
We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994. Effective in May 1999, our name will change to Divicore Inc. We are
planning to reincorporate in Delaware prior to the consummation of the
offering.
----------------
Except as set forth in the consolidated financial statements or as
otherwise specified in this prospectus, all information in this prospectus
assumes:
. a one-for-six reverse split of the outstanding shares of common stock;
. the conversion of all of our outstanding preferred stock into common
stock;
. the exercise of warrants to purchase 920,006 shares of common stock;
. our reincorporation in Delaware;
. the change of our name to Divicore Inc.; and
. no exercise of the underwriters' over-allotment option.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... For general corporate
purposes, including
working capital, product
development, capital
expenditures and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............. DVCR
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding at March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after this offering excludes:
. 2,258,640 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 1999 at a weighted average exercise price of
$1.86 per share;
. shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1995 Stock Option Plan; and
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Capitalization," "Management--Benefit Plans," "Description of Capital
Stock" and Notes 12 and 19 of the notes to our consolidated financial
statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the year ended December
31, 1998 include the operations of Viona Development Hard & Software
Engineering GmbH from April 1998, the date of acquisition by Divicore.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License revenues...... $ 335 $ 1,335 $ 2,770 $ -- $ 1,985
Services revenues..... 490 110 677 10 305
Hardware revenues..... 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues.......... 4,195 6,821 30,288 3,143 10,812
Cost of revenues........ 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit............ 1,059 (1,582) 5,742 66 3,413
Operating loss.......... (1,950) (7,772) (12,961) (1,417) (265)
--------- --------- --------- --------- ---------
Net loss.............. $ (2,055) $ (7,253) $ (13,683) $ (1,544) $ (310)
========= ========= ========= ========= =========
Basic and diluted net
loss per common
share................ $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation............ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share........... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation...... 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
</TABLE>
The weighted average shares outstanding used in the pro forma per common
share calculation reflects the conversion of all outstanding preferred stock
into common stock as though it occurred on the date of issuance and excludes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 2,175 $ 5,898 $
Working capital (deficit)..................... (489) 3,234
Total assets.................................. 16,239 21,678
Debt and capital lease obligations, less
current portion.............................. 977 352
Mandatory redeemable convertible preferred
stock........................................ 14,871 -- --
Total stockholders' equity (deficit).......... (12,779) 8,156
</TABLE>
The balance sheet data set forth above is shown:
. on an actual basis;
. on a pro forma basis to give effect to (A) the conversion of all
outstanding shares of preferred stock into common stock; (B) the exercise
of outstanding warrants to purchase 920,006 shares of common stock at an
exercise price of $0.66 per share upon the consummation of this offering;
(C) the exercise of outstanding warrants to purchase 1,659,251 shares of
common stock at a weighted average exercise price of $0.36 per share; and
(D) the issuance of 675,152 shares of preferred stock subsequent to March
31, 1999 and the conversion of such shares into common stock; and
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering price
of $ per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
7
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. implementing our business strategy;
. obtaining and expanding market acceptance of the products we offer;
. meeting our requirements with our customers;
. forecasts of digital video penetration in the personal computer and
consumer electronics industries;
. competition in the digital video and audio stream management market;
and
. the existence and timing of any consumer shift from analog-based to
digital-based products and the corresponding development of the
digital media market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. Actual
results and events may vary significantly from those discussed in the forward-
looking statements. A description of certain risks that could cause our results
to vary appears under the caption "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus, and we assume no obligation to update them or to explain the
reasons why actual results may differ. In light of these assumptions, risks and
uncertainties, the forward-looking events discussed in this prospectus might
not occur.
8
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. This section describes some,
but not all, of the risks involved in purchasing our common stock. You should
consider carefully the following risks, in addition to the other information
presented in this prospectus, in evaluating us and our business. Any of the
following risks, as well as other risks not mentioned here, could seriously
harm our business and prospects and cause the trading price of our common stock
to decline, which in turn, could cause you to lose all or part of your
investment.
Risks Related to Divicore
We have recently changed our business model, and we have a limited history
operating under our current business model
As a result of our relatively brief operating history as a provider of
digital software solutions, our historical financial information is of limited
value in projecting future operating results. We believe that comparing
different periods of our operating results is not meaningful and you should not
rely on the results for any period as an indication of our future performance.
In addition at some point in the future, these fluctuations may cause us to
perform below the expectations of public market analysts and investors. If our
results were to fall below market expectations, the price of our common stock
may fall significantly. Our limited operating results have varied widely in the
past, and we expect that they will continue to vary significantly from quarter-
to-quarter as we attempt to establish our products in the market. Before
investing, you should consider the risks and challenges frequently encountered
by early stage companies such as ours that are in new and rapidly evolving
markets. In particular, to address these risks we face the following
challenges, among others:
. increasing demand for our products and services;
. maintaining and increasing our consumer base;
. competing effectively with existing and potential competitors; and
. developing further our new and unproven business model.
Divicore was founded in April 1994 as a provider of hardware-based digital
video solutions. In November 1997 we changed our strategic focus from selling
hardware-based digital solutions to licensing software-based digital solutions,
and in early 1999 we discontinued direct sales of hardware-based solutions
altogether to focus exclusively on licensing software-based solutions and
supporting hardware platform designs. This change required us to adjust our
business processes and make a number of significant personnel changes,
including changes and additions to our engineering and marketing teams. We
cannot be certain that our change in business strategy will be successful or
that we will successfully address these risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
You should expect our quarterly operating results to fluctuate in future
periods
Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:
. variations in demand for our products and services;
. the timing of sales of our products and services and the timing of
new releases of personal computer systems, consumer electronics
devices and semiconductors that incorporate our products;
. delays in introducing our products and services;
. changes in our pricing policies or the pricing policies of our
competitors;
9
<PAGE>
. the timing and accuracy of royalty reports received from our
customers;
. the timing of large contracts that materially affect our operating
results in a given quarter;
. changes in the usage of digital media;
. our ability to develop and attain market acceptance of enhancements
to our CineMaster products;
. new product introductions by competitors;
. the mix of license, service and hardware revenues;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
administrative and product management personnel;
. our ability to expand our operations; and
. global economic conditions as well as those specific to personal
computer, consumer electronics, peripherals and semiconductor
manufacturers and other providers of digital video and audio stream
management solutions.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our product management and customer support
capabilities and fund greater levels of research and development. We determine
our operating expenses largely on the basis of anticipated revenue trends and a
high percentage of our expenses are fixed in the short term and are
significant. As a result, any delay in generating or recognizing revenue could
cause significant variations in our operating results from quarter-to-quarter
and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall significantly. See "--Our license revenue is based upon a
customer sales report and we have never audited our customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have a history of losses and we may not be able to achieve profitability in
the future
We incurred net losses of approximately $0.3 million for the three months
ended March 31, 1999, $13.7 million for the year ended December 31, 1998, $7.3
million for the year ended December 31, 1997 and $2.1 million for the year
ended December 31, 1996. As of March 31, 1999, we had an accumulated deficit of
approximately $25.2 million. To date, we have not achieved profitability on a
quarterly or annual basis, and we may not achieve sufficient revenues to
generate profitability in any future period. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis. In addition, we expect to significantly increase our sales and
marketing, product development, engineering and administrative expenses to
grow. As a result, we will need to generate significant revenues to achieve and
maintain profitability.
Our prices may decline as our products becomes commoditized
We expect our prices for our CineMaster products to decline over the next
few years. Most of our current revenues are derived from license fees
originating from sales of personal computer systems which use our Software
CineMaster product as their DVD solution. We expect to face increased
competition in this market, which will make it more difficult to maintain our
revenues and profit margins even if our sales volumes increase. If anticipated
increases in sales volume did not keep pace with anticipated pricing pressures,
our revenues would decline and our business could be harmed. Despite our
efforts to introduce enhancements to our products, we may not be successful in
maintaining our pricing. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE>
Our business currently depends upon our CineMaster products, and it is
uncertain whether the market will continue to accept these products
During 1997 and 1998, we derived virtually all of our license revenues from
the sale of personal computers and peripherals incorporating our CineMaster
products. We expect that license revenues from our CineMaster products will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, our business will be harmed if our existing
manufacturing customers do not continue to incorporate our CineMaster products
or if we are unable to obtain new customers for our CineMaster products. In
seeking market acceptance, it may be difficult for our digital solutions to
displace incumbent solutions employed by manufacturers not currently licensing
our CineMaster products. Manufacturers that are using other solutions would
need to invest in additional training and development tools and convert
software for existing hardware solutions in order to change to a new digital
solution. Accordingly, potential customers may not accept our digital
solutions, which could limit our growth opportunities and harm our prospects.
See "Business--Products and Services."
Our business is currently dependent on a small number of customers
A substantial portion of our license revenues come from three customers,
Dell Computer Corporation, ATI Technologies Inc. and Gateway 2000, Inc. During
1998, Dell Computer accounted for over 81% of our total revenues and 40% of our
gross profit, while ATI Technologies accounted for over 6% of total revenues
and 27% of gross profit. In the quarter ending March 31, 1999, Dell Computer,
ATI Technologies and Gateway accounted for 75%, 6% and 11% of our total
revenues and 27%, 18% and 29% of our gross profit, respectively. We expect a
relatively small number of customers to account for a majority of our revenues
and gross profit, if any, for the foreseeable future. The loss of any of these
or other primary customers, or a material decrease in revenue from these
customers, would immediately harm our business. As a result of our concentrated
customer base, we are subject to risks beyond our control that influence the
success or failure of a particular personal computer or consumer electronics
manufacturer, any one of which could harm our business, including:
. the competition the manufacturer faces and the market acceptance of
its products;
. the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our
technology that it faces in developing its products;
. the financial and other resources of the manufacturer;
. new governmental regulations or changes in taxes or tariffs
applicable to the manufacturer; and
. the failure of third parties to develop and introduce content for
DVD and other digital media applications in a timely fashion.
The inability of us or our customers to successfully address any of these risks
could harm our business. See "Business--Customers."
We do not have long term commitments with our customers
Many of our licensing relationships are of limited duration and do not
contain minimum purchase commitments or are terminable with little or no
notice. As a result, these customers may elect not to incorporate our products
into their products at any time in the future, and we could have little warning
of this election. In any event, we could be required to reach an accommodation
with our customers with respect to any possible contractual provision in order
to obtain additional business and maintain our customer relationships. Any
termination, decrease in orders or election not to renew a contract by our
principal customers would harm our business.
In addition, many of our relationships, including certain relationships with
Dell Computer and Gateway, are not currently governed by definitive written
agreements. In particular, dispute exists with these customers over our
respective liabilities and with respect to potential litigation involving
proprietary rights, including litigation concerning patents related to the
video compression standard known as MPEG-2. Without
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these agreements, we could be required to pay damages or to reimburse our
customers for damages that could arise as a result of litigation related to
this technology.
We have not transferred responsibility for manufacturing and storing the
hardware platform components for our Hardware CineMaster product to a third
party. If we are unable to conclude a definitive manufacturing agreement with
Dell Computer, we will remain liable for the manufacture, storage and delivery
of this product and our business might be harmed. Moreover, the completion of
our transformation from a sales revenue model to a licensing revenue model
could be substantially delayed.
Our success is dependent upon both manufacturers who license our products and
our strategic relationships
Our revenues now consist principally of license fees paid by our customers
for our software solutions and supporting hardware designs. Our products are
currently licensed to personal computer, consumer electronics and peripherals
manufacturers whose products are then sold to end users, and to semiconductor
manufacturers whose products are sold to manufacturers. Our digital solutions
may not be used in a product that is ultimately brought to market, achieves
commercial acceptance or generates meaningful license fees for us. Furthermore,
because we do not control the business practices of our licensees, we do not
influence the degree to which our licensees promote our technology or set the
prices at which the products incorporating our technology are sold to end
users. We face numerous risks in successfully obtaining licensees on terms
consistent with our business model. These risks include, among others:
. the lengthy and expensive process of building a relationship with a
potential licensee before there is any assurance of a license
agreement with such party;
. persuading potential licensees to bear certain development costs
associated with our technology; and
. successfully transferring technical know-how to licensees.
There are a limited number of personal computer and consumer electronics
manufacturers to which we can license our technology in a manner consistent
with our business model.
We rely on certain strategic relationships, such as those with Intel
Corporation, STMicroelectronics, Inc., Dolby Laboratories Licensing Corporation
and ATI Technologies to provide us with state of the art technology, assist us
in integrating our products with leading industry applications and help us make
use of economies of scale in manufacturing and distribution. The loss of any
one of these relationships could harm our business. See "Business--Sales and
Marketing."
Delays in providing our products to our customers may affect how much business
we receive
Our product development efforts may not be successful and we may encounter
significant delays in bringing our products to market. Given the short product
life cycles in our industry, if our product development efforts are not
successful or are significantly delayed, our business will be harmed. In the
past, we have failed to deliver certain new products, upgrades or
customizations on time. In the future, our efforts to remedy this situation may
not be successful and we may lose customers as a result. Delays in bringing to
market new products, enhancements to old products or interfaces between
existing products and new models of personal computers or consumer electronics
devices could be exploited by our competitors. If we were to lose market share
as a result of lapses in our product management, our business would be harmed.
We may not be successful in protecting our proprietary rights
Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable
materials. If we are not successful in protecting our intellectual property,
our business could be substantially harmed.
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Patents. We regard the protection of patentable inventions as important to
our future opportunities. We currently have three U.S. patent applications
pending relating to our digital video and audio stream management technology.
However, none of our technology is patented outside of the United States nor do
we currently have any international patent applications pending. It is possible
that:
. our pending patent applications may not result in the issuance of
patents;
. our patents may not be broad enough to protect our proprietary
rights;
. any issued patent could be successfully challenged by one or more
third parties, which could result in our loss of the right to
prevent others from exploiting the inventions claimed in those
patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our
patents; and
. effective patent protection may not be available in every country in
which we do business.
Trademarks, Copyrights and Trade Secrets. We rely on a combination of laws,
such as copyright, trademark and trade secret laws, and contractual
restrictions, such as confidentiality agreements and licenses, to establish and
protect our proprietary rights. We currently have a pending trademark
application for the mark "Divicore" and a second pending trademark application
for the mark "CineMaster" which has been approved for publication by the PTO.
However, none of our trademarks are registered outside of the United States,
nor do we have any trademark applications pending outside of the United States.
Moreover, despite any precautions which we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon
state or foreign law which precede our federal registration of such
marks;
. current federal laws that prohibit software copying provide only
limited protection from software "pirates," and effective trademark,
copyright and trade secret protection may be unavailable or limited
in certain foreign countries;
. policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming and we are unable to
determine the extent to which piracy of our products and trademarks
may occur, particularly overseas;
. we have provided our source code for Software CineMaster to certain
customers as part of our licensing arrangements with them and the
procedures and practices implemented under the terms of these
licenses may not be sufficient to prevent these customers from
exploiting the source code; and
. we have not currently embedded any copy protection in our software
because we do not believe that these mechanisms are practical or
cost-effective.
See "Business--Intellectual Property and Proprietary Rights."
We may become involved in litigation over proprietary rights, which may be
costly and time consuming
Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software and hardware in our industry may be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Third parties may currently have, or may eventually be
issued, patents that would be infringed by our products or technology. We
cannot be certain that any of these third parties will not make a claim of
infringement against us with respect to our products and technology.
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Any litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements even before the issue
of infringement has been decided on the merits. If any litigation were not to
be resolved in our favor, we could become subject to substantial damage claims
and be enjoined from the continued use of the technology at issue without a
royalty or license agreement. These royalty or license agreements, if required,
might not be available on acceptable terms, or at all, and could harm our
business. If a successful claim of infringement were made against us and we
could not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
From time to time, we have received, and we expect to continue to receive,
notice of claims of infringement of other parties' proprietary rights. For
example:
. Our digital video stream management solutions comply with industry
DVD specifications, which incorporate a video compression technology
known as MPEG-2. We have recently received notice from two of our
customers which are personal computer manufacturers that a third
party with substantial financial resources has alleged that aspects
of MPEG-2 technology infringe upon patents held by the third party.
These customers may in the future seek compensation or
indemnification from us arising out of the third-party claims.
Moreover, we may be required to pay license fees in connection with
the use of the third party's technology in the future.
. A group of companies comprised of consumer electronics manufacturers
has formed a consortium known as MPEG-LA to enforce the proprietary
rights of other holders of patents covering essential aspects of
MPEG-2 technology that are incorporated into our products. MPEG-LA
has notified a number of personal computer manufacturers, including
our customers, that patents owned by members of the consortium are
infringed by the personal computer manufacturers in their
distribution of products that incorporate the MPEG-2 technology.
MPEG-LA has requested that these personal computer manufacturers pay
license fees for use of the technology covered by MPEG-LA patents.
These personal computer manufacturers may in the future seek
compensation or indemnification from us arising out of the MPEG-LA
claims, and we may be required to pay license fees in connection
with the use of MPEG-2 technology in the future.
. A third party has asserted that the parental control features of our
CineMaster products infringe certain patents held by the third
party. A court could determine that we did infringe these patents
and we would be liable for resulting damages.
Any of these notices could result in litigation, which would include all of the
risks discussed above. See "Business--Intellectual Property and Proprietary
Rights."
Our success depends on our ability to successfully manage growth and integrate
businesses or technologies which we may acquire in the future
Our ability to successfully offer our CineMaster products and other products
and services in a rapidly evolving digital video and audio stream management
market requires an effective planning and management process. In addition, we
have limited experience in managing rapid growth. In the last several months,
we have added engineering, sales, marketing, administrative and other
management personnel. Our business will suffer dramatically if we fail to
manage this growth. On March 31, 1999, we had a total of 106 employees compared
to a total of 30 employees on March 31, 1998. Our growth so far has placed
strains on our managerial, financial and personnel resources. We expect these
strains to continue in the future. The pace of our expansion, together with the
complexity of the technology involved in our products, demands an unusual
amount of focus upon the operational needs of our customers for quality,
reliability, timely delivery and post-installation field support. Our existing
licenses rely heavily on our technical expertise in customizing our digital
solutions to their new products. In addition, relationships with new
manufacturing customers generally require significant
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engineering support. Therefore, any increases in adoption of our products by
existing or new customers will increase the strain on our resources, especially
our engineers. To reach our goals, we will need to continue hiring on a rapid
basis while, at the same time, investing in our infrastructure. We will also
need to increase the scale of our operations. We expect that we will also have
to expand our facilities, and we may face difficulties identifying and moving
into suitable office space. In addition, we will need to:
. successfully train, motivate and manage new employees;
. expand our sales and support organization;
. integrate new management and employees into our overall operations;
. implement a more effective cash management system;
. adopt and staff an investor relations program; and
. establish improved financial and accounting systems.
In the future, from time to time, we may make acquisitions or investments in
other companies, products or technologies. If we make any acquisitions, we will
be required to assimilate the operations, products and personnel of the
acquired businesses and train, retain and motivate key personnel from the
acquired businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners.
We may not succeed in anticipating all of the changing demands that growth
will impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our results of operations will suffer. See "Business--
Divicore's Strategy" and "--Employees."
Our success depends upon our management and our ability to attract and retain
additional personnel in a competitive market
Our success depends on the efforts and abilities of our senior management
and certain other key personnel, particularly technical personnel in our
engineering subsidiary in Germany. Many of our officers and key employees are
employed at will. In addition, Mr. Wilde and the principal engineers in our
German subsidiary, Messrs. Sigmund, Horak and Ringelberg, are the only
employees upon whom we have obtained key man life insurance and we do not
expect to obtain such insurance on any of our other senior managers. If any of
these or other key employees left or was seriously injured and unable to work
and we were unable to find a qualified replacement, then our business could be
harmed. We have recently hired new managers and intend to continue hiring key
management personnel. We may not be able to successfully assimilate our
recently hired managers or to hire qualified key management personnel to
replace them.
We intend to hire a significant number of additional sales, support,
marketing, engineering and product management personnel in 1999 and beyond.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Hiring qualified personnel, particularly sales, marketing, engineering
and product management personnel, is very competitive in our industry due to
the limited number of people available with the necessary technical skills and
understanding of the digital video and audio stream management industry. In
addition, we are headquartered in Malvern, Pennsylvania and we have in the past
and expect in the future to face difficulties locating qualified personnel in
this location. We expect to face greater difficulty attracting these personnel
with equity incentives as a public company than we did as a privately held
company. See "Business--Employees."
We may not be able to successfully integrate our newest subsidiary
In April 1998, we completed the acquisition of Viona. However, we may not be
able to successfully integrate the two companies. Combining our companies
requires, among other things, integrating our respective
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technologies, coordinating our research and development and financial reporting
efforts, and continuously evaluating whether existing systems and procedures
meet our growth requirements, especially our financial and internal control
systems and management structure. Certain aspects of the integration are still
in process and may not be completed smoothly or successfully. If we fail to
integrate these areas, we may be unable to maintain uniform standards,
procedures, controls and policies. Integrating certain operations may require
our management to dedicate resources which may temporarily distract them from
our day-to-day business, including from the development of new products, which
could result in delays in introducing such products. Coordinating
geographically separated organizations with distinct cultures may increase the
difficulty of our integration. If we fail to successfully complete the
integration of Viona's operations, our business could be harmed.
Our products may be defective and we may lose business or be sued as a result
Products as complex as our CineMaster products frequently contain undetected
errors. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Despite our extensive quality
assurance process, we have in the past shipped product releases with some
defects, and have discovered other errors in our products after their
commercial shipment. Despite our quality assurance process and that of our
customers, defects and errors may be found in new products or in new versions
or enhancements of existing products after commercial shipment has begun. We
may be required to devote significant financial resources and personnel to
correct such defects. Known or unknown errors or defects that affect the
operation of our products could result in the following, any of which could
harm our business:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
Many of our licenses with customers contain provisions designed to limit our
exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. However, these contractual limitations on liability may not
be enforceable and we may be subject to claims based on defects in our products
or mistakes in performing our services. Our product liability insurance may not
be adequate to cover our losses in the event of a product liability claim
resulting from such defects. Moreover, we may not be able to maintain such
insurance. A product liability claim may harm our financial condition and
results of operations.
Our products incorporate and are used with other companies' products.
Defects, including those in other companies' products, discovered in the future
could result in adverse customer reaction, negative publicity, delays in our
product installation or delays in or failure to achieve market acceptance of
our products. Any of these results could harm our business. See "Business--
Products and Services."
Our license revenue is based upon customer sales reports and we have never
audited our customers
We receive a license royalty for each personal computer system, peripheral
or consumer electronics product sold that contains our Software CineMaster
product and a royalty for each silicon device sold by a semiconductor
manufacturer that incorporates our technology. In collecting these fees,
preparing our financial reports, projections and budgets and in directing our
sales efforts and product development, we rely on our customers to accurately
report the number of units sold. We have never undertaken an audit of any of
our customers to verify that its reported sales unit numbers were accurate.
These reports are subject to potential revision by these manufacturers. If any
of our customers revised their product sales reports, we might be
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required to restate our recognized revenues or adjust our revenues for
subsequent periods, which could harm our business and the price of our common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."
Our business is subject to risks from international operations
We expect to derive an increasing amount of our revenue from sales outside
North America. We have limited experience in marketing and distributing our
products internationally. In addition, there are certain risks inherent in
doing business on an international basis, including, among others:
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. problems in collecting accounts receivable;
. political and economic instability;
. changes in diplomatic and trade relationships;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. variance and unexpected changes in local laws and regulations.
Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We
do not use derivative instruments to hedge foreign exchange risk. In the
future, we may conduct sales in local currencies, in which case, changes in
exchange rates could adversely affect our operating results. In addition, if we
conduct sales in local currencies, we may engage in hedging activities, which
may not be successful and could expose us to additional risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Qualitative and Quantitative Disclosures About Market Risk."
We may not be able to raise needed capital in the future
We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 1999. Our
capital requirements will depend on many factors, including:
. acceptance of and demand for our products;
. the number and timing of acquisitions;
. the costs of developing new products;
. the costs associated with our expansion; and
. the extent to which we invest in new technology and research and
development projects.
To the extent that the proceeds of this offering, our existing sources of
cash and cash flow from operations, if any, are insufficient to fund our
activities, we may need to raise additional funds. If we issue additional stock
to raise capital, your percentage ownership in Divicore would be reduced.
Further, such additional stock may have rights, preferences or privileges
senior to those you possess as a holder of our common stock. Additional
financing may not be available when needed and, if such financing is available,
it may not be available on terms favorable to us. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
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The name of our business is changing and the market and potential customers may
not recognize our new name for some time
We are in the process of changing our name from Quadrant International, Inc.
to Divicore Inc. It is likely that for a period of time after this change
occurs, potential customers and the market in general may not recognize our new
name. If potential customers do not realize who we are, we may lose future
business to competitors, which would harm our business.
Our officers and directors will be able to exert significant control over our
future direction
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately % of our outstanding common stock
following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders."
We have adopted certain anti-takeover provisions
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Further, without any further vote or
action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever
issued, may have preference over and harm the rights of the holders of common
stock. Although the issuance of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. We currently have no plans to issue
preferred stock.
Our certificate of incorporation and by-laws include provisions that may
have the effect of deterring an unsolicited offer to purchase Divicore. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
Divicore. Furthermore, upon reincorporation, our board of directors will be
divided into three classes, only one of which is elected each year. Directors
will only be capable of being removed by the affirmative vote of 66 2/3% or
greater of all classes of voting stock. These factors may further delay or
prevent a change of control of Divicore. See "Description of Capital Stock--
Antitakeover Effects of Provisions of the Certificate of Incorporation, By-laws
and Delaware Law."
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Risks Related to our Industry
Our revenues are dependent upon increasing penetration of digital video
technologies in the personal computer and consumer electronics industries
The personal computer and consumer electronics industries are presently the
principal markets for our digital video and audio solutions. As a result, our
results of operations will depend largely on consumer acceptance of the
products that incorporate our digital video technology. In particular, in the
near term, we are dependent on the success of DVD-related products. Our
dependence on these industries involves several risks and uncertainties,
including:
. the decision by personal computer and consumer electronics
manufacturers to select our digital solutions for incorporation into
their products;
. the developing and marketing of content by third party content
providers for end user systems such as DVD players and desktop
computers in a format compatible with our digital solutions;
. the sustaining and developing of the demand for DVD players or other
existing applications;
. whether semiconductor manufacturers developing silicon devices for
personal computer and consumer electronics manufacturers will design
our digital solutions into their devices and successfully introduce
these devices;
. the potential for declining demand for DVD solutions in lower price
personal computers;
. changes in consumer requirements and preferences;
. the introduction of products by our competitors embodying new
technologies or features;
. limited opportunities for design wins due to the small number of
product manufacturers in these industries and the length of product
life cycles;
. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications, such as handheld
personal computers and set-top boxes, which have only recently been
introduced to the market; and
. the current lack of open industry standards for software and
hardware in the consumer electronics industry.
Factors negatively affecting the consumer electronics or personal computer
industries could harm our business. Moreover, to the extent that the
performance, functionality, price and power characteristics of our digital
solutions fail to satisfy customers who have a critical need for specific
digital applications, the use of our digital solutions could become confined to
a limited segment of these industries. See "Business--Sales and Marketing" and
"--Strategy."
Our markets are highly competitive
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing and which are characterized by short product life cycles
and price erosion. Our competitors in the software-based digital solution
market include Mediamatics, Inc. (a subsidiary of National Semiconductor,
Inc.), Zoran Corporation and Xing Technology Corporation (which has agreed to
be acquired by RealNetworks, Inc.). Our competitors in the hardware-based
digital solution market include Sigma Designs, Inc. and several smaller
competitors. We also compete with the internal research and development
departments of other software companies as well as those of personal computer,
peripherals, consumer electronics and semiconductor manufacturers who are in
the market for specific digital video or audio software applications. Numerous
other major personal computer manufacturers, software developers and other
companies are focusing significant resources on developing and marketing
products and services that will compete with our CineMaster products. Some
semiconductor manufacturers are positioning their products as offering
hardware-based digital video and audio management capabilities and marketing
such products as equal or superior to our CineMaster products. In
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the future, operating system providers with a larger established customer base,
such as Microsoft, may enter the digital video or audio stream management
markets by building video or audio stream management applications into their
operating systems. Personal computer and consumer electronics manufacturers may
use such products as their digital solutions.
We anticipate continued growth and competition in the digital video industry
and the entrance of new competitors into our markets, and that, accordingly,
the market for our products will remain intensely competitive. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may
have significantly more personnel or greater financial, technical, marketing
and other resources than either we or our current competitors do. Furthermore,
our future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business. See "Business--Competition."
We must manage technological change, respond to evolving industry standards and
enhance our products' interoperability with the products of our customers
Future versions of software and hardware platforms embodying new
technologies or the emergence of new industry standards could render our
products and services obsolete or uncompetitive. The market for digital video
and audio stream management hardware and software is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Since the digital video and audio
market is still evolving, only a limited number of commercial and consumer
products incorporating our digital solutions are currently in volume
production. Our results of operations will depend upon our ability to develop
and introduce a variety of new products and product enhancements to address the
increasingly sophisticated needs of our customers.
Our results of operations will depend on the extent to which our CineMaster
products are incorporated into the products of leading personal computer,
consumer electronics, peripherals and semiconductor manufacturers. Their
willingness to incorporate our products depends upon whether we succeed in
developing enhancements and new generations of our software and hardware that
satisfy the requirements of specific system or program applications and
introduce these new technologies to the marketplace in a timely manner. We must
constantly modify or improve our products to keep pace with changes made to
these platforms and other systems. If we fail to modify or improve our products
in response to evolving industry standards, our products could rapidly become
obsolete, which would harm our business. If the characteristics of our digital
solutions are not compatible with the requirements of specific system or
program applications, the likelihood that our customers will design our
products into their systems and devices will decrease and our business will be
harmed.
Technical innovations in our markets involve several risks, including:
. our ability to anticipate and timely respond to changes in the
requirements of consumer electronics and personal computer
manufacturers;
. changing consumer preferences in the consumer electronics and
personal computer markets;
. the introduction by our competitors of products embodying popular
new technologies or features;
. the emergence of new standards in digital video and audio stream
management within the consumer electronics and personal computer
industries; and
. the significant investment that is often required before commercial
viability is determined.
Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition,
we may not have the financial and other resources necessary to develop digital
solutions in the future, or develop any enhancements or new generations of the
technology that generate revenue in excess of the costs of development. See
"Business--Research and Development."
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Year 2000 issues present technological risks to our business and could harm
sales
In order to save valuable memory, many existing computer systems and
software programs were designed to calculate or refer to the year in any
calendar date using the last two digits and presuming that the first two digits
are "19." As a result, these systems and programs may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results known as Year 2000 failures. If
the systems or programs look ahead of the current date for any reason, they may
need to refer to dates occurring after December 31, 1999. As a result, Year
2000 failures may occur at any time, including prior to January 1, 2000.
Neither our Hardware CineMaster nor our Software CineMaster products make
use of calendar clocks in any way. However, our products are incorporated into
software and hardware of personal computer, consumer electronics, computer
peripheral and semiconductor manufacturers, some of which may make use of
calendar clocks and may therefore experience Year 2000 failures. We have
recently initiated a comprehensive assessment of the possibility of Year 2000
failures affecting us and we have replaced our internal computer systems and
application software as a precaution. However, we cannot assure you that third-
party software and hardware that is incorporated into our information systems
will not need to be revised or replaced as well. If we were required to replace
these third-party products, our business could be harmed. In addition, we have
performed operational tests on our products as incorporated into those of our
customers and these tests have not resulted in Year 2000 failures. Nonetheless,
these tests may not be completely accurate and Year 2000 failures may occur. If
our customers' hardware or software were to suffer Year 2000 failures, such
failures might cause our CineMaster products to fail as well. Changes required
to respond to Year 2000 failures caused by interoperability issues could be
expensive and time consuming and lead to lost revenues, breach of contract
claims, higher operating costs, loss of customers and other business
interruptions, any of which could harm our business.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of Divicore's
control may suffer Year 2000 failures. If these entities were to suffer Year
2000 failures, a systemic failure might occur which is beyond our control, such
as a prolonged Internet, telecommunications or electrical failure. A systemic
failure could prevent us from delivering our services to our customers or cause
other business disruptions, such as preventing our customers or potential
customers from accessing our Internet web site. Any significant disruption in
the infrastructure on which we rely could harm our business. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--Year
2000 Compliance."
We face risks from the uncertainties of governmental regulation
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the digital delivery
mediums, it is possible that future laws and regulations may be adopted that
regulate DSS/DBS or other markets in which our products are sold. Such
regulatory measures may include, among other things:
. pricing;
. content;
. copyrights;
. export controls (particularly regarding data encryption);
. distribution; and
. characteristics and quality of products and services.
The growth and development of the digital media market may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business in this segment. The adoption of any
additional laws or regulations may decrease the expansion of this market and
harm our
21
<PAGE>
business. Our business could be harmed by any new legislation or regulation,
the application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the digital media market.
Risks Related to this Offering
We have substantial discretion as to how to use the proceeds from this offering
We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on marketing, research and development and product
management. We may also use some of the proceeds to acquire other businesses,
products or technology which would complement our existing products, expand our
market coverage or enhance our technological capabilities. We have no specific
plan as to how we will spend the proceeds of this offering. As a result, our
management will have discretion over how to use all of the funds provided by
this offering. If our management uses poor judgment in spending the proceeds,
our business will be adversely affected. We cannot assure you that investment
of the proceeds will yield a favorable return or any return. See "Use of
Proceeds."
There has been no prior public market for our common stock, and the price of
our common stock may be volatile
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop in the future. If an active trading
market does develop, it may not last. Moreover, if an active market does
develop, the trading price of the shares being sold in this offering may
fluctuate widely as a result of a number of factors, most of which are outside
our control. Some of these factors include:
. quarter-to-quarter variations in our operating results;
. our announcements about the performance of our products and our
competitors' announcements about performance of their products;
. changes in earnings estimates by, or failure to meet the
expectations of, analysts;
. government regulatory action;
. increased price competition;
. developments or disputes concerning intellectual property rights;
and
. general conditions in the computer industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.
We are negotiating the initial offering price of the common stock with the
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial public offering
price. See "Underwriting."
Our stock price may be affected by shares eligible for future sale
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options and warrants, the trading price of our common
stock could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will
22
<PAGE>
have outstanding shares of common stock (based upon shares
outstanding as of March 31, 1999), assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
March 31, 1999. Of these shares, the shares sold in this offering will
be freely tradable. This leaves shares eligible for sale in the
public market 180 days from the date of this prospectus, substantially all of
which are subject to lock up agreements. Bear, Stearns & Co. Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements.
After this offering, if certain conditions are met, the holders of
approximately 5,961,046 shares of common stock and the holders of warrants to
purchase up to approximately 1,608,172 shares of common stock will be entitled
to require us to register their shares under the Securities Act. These
shareholders also have the right to participate in any registration of our
shares which we undertake on our own. If these shareholders exercise their
registration rights, a large number of our shares may be registered and sold in
the public market. This could adversely affect the trading price for our
shares. If we attempted to raise money through a registration and sale of our
stock and these shareholders forced us to allow them to participate in the
registration, our ability to raise the amount of money we need to execute our
business plan could be adversely affected. See "Description of Capital Stock--
Registration Rights."
You will experience substantial dilution in the value of your shares
immediately following this offering
The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."
23
<PAGE>
USE OF PROCEEDS
The net proceeds to Divicore from the sale and issuance of the shares
of common stock offered hereby are estimated to be $ million (approximately
$ million if the underwriters' over-allotment option is exercised in full),
at the assumed initial public offering price of $ per share after deducting
the underwriting discount and estimated offering expenses. Divicore is
conducting this offering primarily to increase its equity capital, create a
public market for its common stock and to facilitate future access by Divicore
to public equity markets. Divicore intends to use the net proceeds for general
corporate purposes, including working capital, product development and capital
expenditures. In addition, Divicore may use a portion of the net proceeds to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. Divicore has no commitments with
respect to any acquisition or investment, and it is not involved in any
negotiations with respect to any similar transaction. Pending these uses, the
net proceeds of this offering will be invested in short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
Divicore has never declared or paid dividends on its capital stock and does
not anticipate declaring or paying cash dividends in the foreseeable future.
Divicore anticipates that it will retain all future earnings, if any, for use
in its operations and the expansion of its business. Payments of future
dividends, if any, will be at the discretion of Divicore's board of directors
after taking into account various factors, including its financial condition,
operating results, current and anticipated cash needs and plans for expansion.
Moreover, pursuant to agreements with its lender, Divicore is prohibited from
declaring or paying dividends without the prior written consent of the lender.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CORPORATE INFORMATION
Divicore Inc. was incorporated in Pennsylvania in April 1994 as Quadrant
Sales International, Inc. and changed its name to Quadrant International, Inc.
in May 1994 and to Divicore Inc. effective in May 1999. Divicore Inc. plans to
reincorporate in Delaware prior to the consummation of the offering. References
in this prospectus to "Divicore," "we," "our," and "us" collectively refer to
Divicore Inc., a Delaware corporation, and its subsidiaries, and not to the
underwriters. Divicore's principal executive offices are located at One Great
Valley Parkway, Malvern, Pennsylvania, 19355 and its telephone number is (800)
700-0362.
Divicore, the Divicore logo and CineMaster are trademarks of Divicore Inc.
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Divicore as of March
31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to (A) the conversion of all
outstanding shares of preferred stock into common stock; (B) the
exercise of outstanding warrants to purchase 920,006 shares of
common stock at an exercise price of $0.66 per share upon the
consummation of this offering; (C) the exercise of outstanding
warrants to purchase 1,659,251 shares of common stock at a weighted
average exercise price of $0.36 per share; and (D) the issuance of
675,152 shares of preferred stock subsequent to March 31, 1999 and
the conversion of such shares into common stock;
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering
price of $ per share and after deducting the underwriting
discounts and commissions and estimated offering expenses.
This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------
Pro As
Actual Forma Adjusted
------- -------- --------
(In thousands, except
share data)
<S> <C> <C> <C>
Current portion of long-term obligations........... $ 2,073 $ 2,073 $
======= ======== ====
Long-term obligations, excluding current portion... 977 352
------- -------- ----
Mandatory redeemable convertible preferred stock:
31,523,684 shares, $.06 par value per share,
authorized, actual and pro forma; 5,000,000
shares, $.001 par value per share, authorized, as
adjusted; 3,913,072 shares $.06 par value per
share, issued and outstanding, actual net of
subscription receivable of $625,000 for 125,502
shares; no shares issued and outstanding,
pro forma; no shares, $.001 par value per share,
issued and outstanding, as adjusted............... 14,871 --
Stockholders' equity:
Common stock: 80,000,000 shares, $.06 par value per
share, authorized, actual and pro forma;
30,000,000 shares, $.001 par value per share,
authorized, as adjusted; 3,520,851 shares, $.06
par value per share, issued, actual; 10,488,332
shares, $.06 par value per share, issued,
pro forma; shares, $.001 par value per
share, issued and outstanding, as adjusted........ 211 641
Additional paid-in capital......................... 14,147 35,152
Deferred stock compensation........................ (1,182) (1,182) --
Accumulated deficit................................ (25,189) (25,189)
Cumulative foreign currency translation
adjustment........................................ (46) (46)
Subscription note receivable....................... -- (500)
Treasury stock, at cost, 200,000 shares............ (720) (720)
------- -------- ----
Total stockholders' equity (deficit)............. (12,779) 8,156
------- -------- ----
Total capitalization............................. $ 3,069 $ 8,508 $
======= ======== ====
</TABLE>
25
<PAGE>
The common stock outstanding after this offering excludes:
. 2,258,640 shares of common stock issuable upon exercise of stock
options outstanding at a weighted average exercise price of $1.86
per share;
. shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
. 500,000 shares of common stock reserved for issuance under
Divicore's 1999 Employee Stock Purchase Plan.
See "Management--Benefit Plans," "Description of Capital Stock" and Notes 12
and 19 the of notes to the consolidated financial statements.
26
<PAGE>
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of shares of common stock in the offering exceeds the net
tangible book value per share of common stock after the offering. The pro forma
net tangible book value per share of common stock is determined by subtracting
Divicore's total liabilities from the total book value of its tangible assets
and dividing the difference by the number of shares of common stock deemed to
be outstanding on the date as of which such book value is determined.
The pro forma net tangible book value of Divicore at March 31, 1999, was
approximately $3,780,000, or $0.36 per share. After giving effect to the sale
of the shares of common stock offered by Divicore at the assumed initial public
offering price of $ per share, and after deducting underwriting discounts
and estimated offering expenses, Divicore's pro forma net tangible book value
at March 31, 1999, would have been $ , or $ per share. This
represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share
to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of March 31,
1999.......................................................... $ 0.36
Pro forma increase attributable to new investors............... $
------
Pro forma net tangible book value per share after the offering...
------
Pro forma dilution per share to new investors.................... $
======
</TABLE>
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to Divicore and the average
price per share paid by existing stockholders and by new investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $ per share (before deducting the underwriting discount and
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- --------------------- Average Price
Number Percent Amount Percent Per-Share
---------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 10,488,332 % $35,151,948 % $3.35
New investors........... % $ % $
---------- --------- ----------- -----
Totals................ 100.0% $ $ 100.0%
========== ========= =========== =========
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to
be exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $0.36
per share which will remain outstanding following the offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after the offering excludes:
. 2,258,640 shares of common stock issuable upon exercise of stock
options outstanding at a weighted average exercise price of $1.86
per share
. shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
27
<PAGE>
. 500,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization," "Management--
Benefit Plans," "Description of Capital Stock" and Notes 12 and 19 of the notes
to the consolidated financial statements.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1998, and the consolidated balance sheet
data at December 31, 1997 and 1998, are derived from the consolidated financial
statements of Divicore which have been audited by KPMG LLP, independent
accountants, and are included elsewhere in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1995, and the
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
audited consolidated financial statements of Divicore not included in this
prospectus. The consolidated statement of operations data for the period from
April 1994 (inception) to December 31, 1994 and the consolidated balance sheet
data at December 31, 1994, are derived from the unaudited consolidated
financial statements of Divicore not included in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1998
include the operations of Viona Development Hard & Software Engineering GmbH
from April 1998, the date of acquisition by Divicore. The 1998 pro forma
consolidated statement of operations data is presented as if the acquisition
occurred on January 1, 1998. The consolidated statement of operations data for
each of the three-month periods ended March 31, 1998 and 1999, and the
consolidated balance sheet data at March 31, 1999, are derived from unaudited
interim consolidated financial statements of Divicore included elsewhere in
this prospectus. The unaudited interim consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. The historical
results are not necessarily indicative of results to be expected for any future
period. The selected consolidated financial data set forth below should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements of
Divicore and the notes thereto and the unaudited pro forma financial statements
included elsewhere in this prospectus. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations."
<TABLE>
<CAPTION>
Period from
April 1994 Three Months Ended
(inception) Year Ended December 31, March 31,
to ------------------------------------------------------- --------------------
December 31, 1998
1994 1995 1996 1997 1998 Pro Forma 1998 1999
------------ --------- --------- --------- --------- ----------- --------- ---------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License revenues....... $ -- $ -- $ 335 $ 1,335 $ 2,770 $ 2,770 $ -- $ 1,985
Services revenues...... -- 229 490 110 677 677 10 305
Hardware revenues...... 127 972 3,370 5,376 26,841 26,841 3,133 8,522
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.......... 127 1,201 4,195 6,821 30,288 30,288 3,143 10,812
Cost of revenues........ 62 776 3,136 8,403 24,546 24,546 3,077 7,399
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............ 65 425 1,059 (1,582) 5,742 5,742 66 3,413
Research and
development............ 78 319 1,034 1,828 3,121 3,037 498 1,465
Sales and marketing..... 63 305 731 1,158 1,964 1,995 465 1,062
General and
administrative......... 35 497 1,198 1,710 4,673 4,710 505 837
Depreciation and
amortization........... 3 23 46 86 906 1,128 15 314
Compensation related to
stock options.......... -- -- -- 1,408 139 139 -- --
Acquired in-process
research and
development............ -- -- -- -- 7,900 7,900 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating loss.......... (114) (719) (1,950) (7,772) (12,961) (13,167) (1,417) (265)
Interest expense, net... 3 36 105 197 722 711 127 45
Other income............ -- -- -- 716 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss............... $ (117) $ (755) $ (2,055) $ (7,253) $ (13,683) $ (13,878) $ (1,544) $ (310)
========= ========= ========= ========= ========= ========= ========= =========
Basic and diluted net
loss per common
share(1)............... $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (4.94) $ (4.41) $ (0.73) $ (0.18)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
computing per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 2,920,677 3,316,782 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share(1)........ $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (2.60) $ (2.46) $ (0.73) (0.08)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 5,547,260 5,943,365 2,103,654 7,233,923
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31, 1999
------------------------------------------ ------------------------------
Pro Forma
1994 1995 1996 1997 1998 Actual Pro Forma As Adjusted
----------- ---- ------ ------ -------- ------- --------- -----------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $61 $ 17 $ 53 $ 607 $ 1,024 2,175 5,898
Total assets............ 25 707 1,900 2,569 17,374 16,239 21,678
Debt and capital lease
obligations, less
current portion........ 130 557 725 732 1,418 977 352
Mandatory redeemable
convertible preferred
stock.................. -- -- -- -- 14,589 14,871 --
Total stockholders'
equity (deficit)....... (66) (774) (922) (6,084) (12,236) (12,779) 8,156
</TABLE>
See Note 1 of the notes to the consolidated financial statements for a
detailed explanation of the determination of the shares used to compute basic
and diluted net loss per share.
The balance sheet data set forth above is shown:
. on an actual basis;
. on a pro forma basis to give effect to (A) the conversion of all
outstanding shares of preferred stock into common stock; (B) the exercise
of outstanding warrants to purchase 920,006 shares of common stock at an
exercise price of $0.66 per share upon the consummation of this offering;
(C) the exercise of outstanding warrants to purchase 1,659,251 shares of
common stock at a weighted average exercise price of $0.36 per share; and
(D) the issuance of 675,152 shares of preferred stock subsequent to March
31, 1999 and the conversion of such shares into common stock; and
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering price
of $ per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Divicore should be read in conjunction with the consolidated
financial statements and notes thereto and the unaudited pro forma financial
statements included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Divicore's
actual results could differ from those anticipated in these forward-looking
statements as a result of various factors including but not limited to, those
discussed in "Risk Factors," "Business" and elsewhere in this prospectus.
Overview
Divicore designs, develops, licenses and markets innovative core-based
modular software solutions that enable digital video and audio stream
management in personal computer systems and consumer electronics devices.
Divicore also licenses supporting hardware designs to selected customers and
provides customization services and customer support. Divicore's solutions
enable decoding and encoding multimedia formats such as DVD, DBS/DVB and HDTV
on existing personal computer and consumer electronics platforms. Divicore's
digital solutions incorporate industry standards for video and audio
compression and are independent of operating systems and silicon components.
Divicore's customers consist primarily of personal computer and consumer
electronics manufacturers. In addition, Divicore supplies its software
solutions and hardware designs to selected peripherals providers and
semiconductor manufacturers. In 1998 and the first quarter of 1999, Divicore
generated substantially all of its total revenues, respectively, from personal
computer and peripherals manufacturers. However, Divicore anticipates that an
increasing percentage of revenues, beginning in the second half of 1999, will
be derived from consumer electronics and semiconductor manufacturers.
Prior to 1998, Divicore generated revenue primarily from direct sales of its
hardware solutions to retail distributors and end users. In 1998, substantially
all of Divicore's revenues were derived from Software CineMaster 98 and
Hardware CineMaster 98. Divicore introduced the first in its line of digital
video products in March 1997 with the launch of CineMaster, a hardware and
software solution sold to personal computer manufacturers, which enabled DVD
playback on a personal computer. In December 1997, Divicore introduced its
second generation hardware and software solution called Hardware CineMaster 98.
In August 1998, Divicore launched its software-only solution, Software
CineMaster 98, and began to transition its business model from a direct product
sales approach to a license approach. As part of its license approach, in
February 1999, Divicore began entering into manufacturing and license
agreements with third parties under which Divicore will no longer manufacture
Hardware CineMaster 98. Instead, Divicore will receive a per unit license fee
on all future sales of Hardware CineMaster 98. Divicore is currently in the
process of completing its transition to a license model and, in the future,
Divicore expects that most of its revenues will be derived from licenses of its
software and its hardware designs. As a result of this change, Divicore will
recognize lower revenues in 1999 than in 1998, which Divicore expects to be
accompanied by a decrease in its cost of revenues.
Divicore's revenues are comprised of hardware revenues, license revenues and
services revenues. Hardware revenues, consisting of direct sales of hardware
subsystems to personal computer and peripherals manufacturers, have represented
most of Divicore's total revenues in the past but are expected to be nominal in
the future. License revenues consist of fees paid on a per unit basis, or in
certain cases in advance, each time a manufacturer ships a product that
incorporates Divicore's software solutions or software with supporting hardware
designs. License revenues are charged either as a percentage of the revenue
received by the seller on sales of the products or on a per unit basis. Service
revenues consist of engineering fees from consumer electronics, personal
computer, peripherals and semiconductor manufacturers for custom engineering
services. Services are generally billed on either a time and material basis or
on a project or contract basis.
31
<PAGE>
License revenues are recognized when earned, which is generally based on
receiving notification from a licensee detailing the shipments of products
incorporating Divicore technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers.
Divicore's license agreements generally have a term of one year or more, and
typically require payment within 45 days after the end of the calendar quarter
in which the product is shipped. Some of Divicore's contracts may also require
payment of an up-front license fee. License fees paid in advance, with no
further future commitment, are recognized in the period received. The amount
and timing of prepaid fees could cause Divicore's operating results to vary
significantly from period to period. Services revenues are recognized upon
delivery of the service in the case of time and material contracts or on a
percentage completion basis in the case of project-based contracts. Hardware
product sales are recognized upon shipment of the product to the manufacturer
or end user.
Divicore's revenues are concentrated among a few customers. In 1998, Dell
Computer accounted for approximately 81% of total revenues and 40% of gross
profit. ATI Technologies accounted for approximately 6% of total revenues and
27% of gross profit. Revenues from ATI Technologies made a relatively larger
contribution to gross profit because revenues from ATI Technologies consisted
entirely of license fees. In the three months ended March 31, 1999, Dell
Computer, ATI Technologies and Gateway accounted for 73%, 6% and 10% of
Divicore's revenues and 34%, 20% and 24% of its gross profit, respectively.
While Divicore believes that the number of customers incorporating its
technology into their products will grow, Divicore expects that a significant
portion of revenue will continue to be concentrated among a relatively small
number of customers for the foreseeable future. The revenues from particular
customers may vary widely from period to period depending on the addition of
new contracts and the volumes and prices at which licensees sell Divicore-
enabled products to end users in any given period.
Divicore sells its products directly to personal computer and consumer
electronics manufacturers in the United States and Europe and through a sales
representative in Japan. To date, companies based in the Pacific Rim and Europe
have accounted for a small portion of Divicore's revenues. Sales outside of the
United States have been primarily through U.S. manufacturers that distribute
their products to end users overseas.
In April 1998, Divicore acquired Viona, a German engineering services
company. Prior to the acquisition, Divicore had contracted Viona to co-develop
its products and a significant portion of its software and systems
architecture. The purchase price was approximately $11.4 million, and the
acquisition was recorded under the purchase method of accounting. The results
of operations of Viona have been included in Divicore's operating results since
the date of acquisition. In connection with the acquisition, Divicore expensed
$7.9 million of the Purchase Price as acquired in-process research and
development. Divicore plans to amortize the remaining goodwill and other
intangibles associated with the acquisition over the next four years. See "--
Acquired In-Process Research and Development" and Note 4 of the notes to
consolidated financial statements.
In April 1999, Divicore completed a financing in which it issued convertible
securities to Intel of $4.7 million and entered into a license agreement
covering certain Intel technology.
Divicore's future net income and cash flow will also be affected by its
ability to apply its net operating losses, which totaled approximately $14.1
million for federal tax reporting purposes as of March 31, 1999, against
taxable income in future periods. Due to the uncertainty of Divicore's ability
to realize the benefit of the deferred tax assets, the deferred tax assets are
fully offset by a valuation allowance. Under the Tax Reform Act of 1986, the
use of net operating losses may be impaired or limited in certain
circumstances, including a cumulative ownership change of greater than 50% over
a three-year period. The consummation of this offering, together with previous
equity transactions, will most likely result in a cumulative ownership change
of greater than 50%. Accordingly, Divicore's net operating losses incurred
prior to this offering that can be used to reduce future taxable income for
federal tax purposes will most likely be limited. Future changes of ownership,
including this offering, could further limit Divicore's use of net operating
losses and could have an adverse effect on its net income and cash flow.
Changes in tax laws in the United States or in our status may limit Divicore's
ability to use its net operating losses. Any limitation on Divicore's ability
to use its net operating losses could harm its business. See Note 15 of the
notes to consolidated financial statements.
32
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items reflected in Divicore's
consolidated statements of operations:
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
---------------------- -------------
1996 1997 1998 1998 1999
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
License revenues.................... 8.0% 19.6% 9.1% -- 18.4%
Services revenues................... 11.7 1.6 2.2 0.3% 2.8
Hardware revenues................... 80.3 78.8 88.7 99.7 78.8
----- ------ ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues..................... 74.8 123.2 81.0 97.9 68.4
----- ------ ----- ----- -----
Gross profit......................... 25.2 (23.2) 19.0 2.1 31.6
Research and development............. 24.6 26.8 10.3 15.8 13.6
Sales and marketing.................. 17.4 17.0 6.5 14.8 9.8
General and administrative........... 28.6 25.0 15.4 16.1 7.6
Depreciation and amortization........ 1.1 1.3 3.0 0.5 2.9
Compensation related to stock
options............................. -- 20.6 0.5 -- --
Acquired in-process research and
development......................... -- -- 26.1 -- --
----- ------ ----- ----- -----
Operating loss....................... (46.5) (113.9) (42.8) (45.1) (2.3)
Interest expense, net................ 2.5 2.9 2.4 4.0 0.4
Other income......................... -- 10.5 -- -- --
----- ------ ----- ----- -----
Net loss.......................... (49.0)% (106.3)% (45.2)% (49.1)% (2.7)%
===== ====== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 and 1999
Revenues. Total revenues increased 244% from $3.1 million for the quarter
ended March 31, 1998 to $10.8 million for the quarter ended March 31, 1999.
License revenues increased to $2.0 million for the quarter ended March 31,
1999, due primarily to growth in license fees associated with Divicore's
Software CineMaster 98 product. Services revenues increased from $0.01 million
to $0.3 million for the quarter ended March 31, 1999, representing primarily
increased customization services related to Divicore's consumer electronics
business. Hardware revenues increased 172% from $3.1 million for the quarter
ended March 31, 1998 to $8.5 million for the quarter ended March 31, 1999, due
primarily to increased market acceptance of Divicore's Hardware Cinemaster 98
product.
Cost of Revenues. Cost of revenues consist primarily of manufacturing costs
associated with Divicore's hardware solution, costs associated with shipment of
Divicore's software solution and license fees paid to third parties for
technologies incorporated into Divicore's products, including Dolby Digital
technology. Cost of revenues increased 140% from $3.1 million for the quarter
ended March 31, 1998 to $7.4 million for the quarter ended March 31, 1999. The
increase in cost of revenues was primarily due to increased product costs
associated with the manufacturing of Divicore's hardware related products and
increased sublicense fees associated with the licensing of third party
technology.
Gross Profit. Gross profit increased from $0.07 million for the quarter
ended March 31, 1998 to $3.4 million for the quarter ended March 31, 1999,
primarily due to increased revenues. As a percentage of total revenues, gross
profit increased from 2% for the quarter ended March 31, 1998 to 32% for the
quarter ended March 31, 1999, primarily as a result of a higher proportion of
license revenues associated with Divicore's transition during this quarter to a
business model based on licensing its technology rather than direct sales of
hardware products.
33
<PAGE>
Research and Development Expenses. Research and development expenses consist
primarily of engineering and related costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 194%, from
$0.5 million for the quarter ended March 31, 1998 to $1.5 million for the
quarter ended March 31, 1999. As a percentage of total revenues, research and
development expenses decreased from 16% to 14%. The increase in research and
development expenses in absolute dollars was due primarily to supporting an
expanded customer base and additional new products. The decrease in research
and development expenses as a percentage of total revenues resulted primarily
from Divicore's increased revenue base. Divicore expects research and
development expenses to continue to increase in absolute dollars in 1999
compared to 1998 as Divicore adds additional engineering staff and
capabilities.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, travel expenses and costs associated with trade shows, advertising
and other marketing efforts, as well as technical support costs. Sales and
marketing expenses increased 128% from $0.5 million for the quarter ended March
31, 1998 to $1.1 million for the quarter ended March 31, 1999. As a percentage
of total revenues, sales and marketing expenses decreased from 15% to 10%. The
increase in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States and the increased emphasis on enhancing
market awareness. The decrease in sales and marketing expenses as a percentage
of total revenues resulted primarily from Divicore's increased revenue base.
Divicore expects sales and marketing expenses to increase in absolute dollars
in 1999 compared to 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and support costs for Divicore's finance, human
resources, information systems and other management departments. General and
administrative expenses increased 66% from $0.5 million for the quarter ended
March 31, 1998 to $0.8 million for the quarter ended March 31, 1999. As a
percentage of total revenues, general and administrative expenses decreased
from 16% to 8%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support Divicore's growing
business operations. General and administrative expenses decreased as a
percentage of total revenues primarily due to Divicore's increased revenue
base. Divicore expects general and administrative expenses to increase in
absolute dollars in 1999 compared to 1998 as it continues to build the
necessary infrastructure to support its business operations and incurs greater
legal and accounting expenses as a public company.
Deferred Stock Compensation. In September 1998 and February 1999, Divicore
recorded $0.8 million and $0.5 million, respectively, of deferred stock
compensation in connection with grants of stock options. Divicore will amortize
this amount as compensation expense over the four year vesting period of the
options which will approximate $0.08 million per quarter.
Depreciation and Amortization Expense. Divicore recorded depreciation and
amortization expense of $0.3 million for the quarter ended March 31, 1999
primarily related to the goodwill recorded as part of the Viona acquisition.
See "--Acquired In-Process Research and Development Expense."
Years Ended December 31, 1997 and 1998
Revenues. Total revenues increased 344% from $6.8 million in 1997 to $30.3
million in 1998. License revenues increased 107% from $1.3 million in 1997 to
$2.8 million in 1998, primarily due to Divicore's launch of its first software
solution. Services revenues increased 515% from $0.1 million in 1997 to $0.7
million in 1998, primarily due to the completion of one large engineering
services contract in 1997. Hardware revenues increased 399% from $5.4 million
in 1997 to $26.8 million in 1998, primarily due to increased market acceptance
of Divicore's products, and significant sales to Dell Computer which
incorporated Divicore's solution into a particular line of personal computers.
Cost of Revenues. Cost of revenues increased 192%, from $8.4 million in 1997
to $24.5 million in 1998. The increase in cost of revenues was primarily due to
increased product costs associated with the manufacturing of Divicore's
hardware related products and increased sublicense fees associated with the
license of third party technology.
34
<PAGE>
Gross Profit. Gross profit increased from a negative $1.6 million in 1997 to
$5.7 million in 1998. As a percentage of total revenues, gross profit increased
from a negative 23% to 19% in 1998. The increase in gross profit both in
absolute dollars and as a percentage of total revenues was primarily due to
growth in Divicore's software and license business and the growth in sales of
hardware subsystems.
Research and Development Expenses. Research and development expenses
increased 71% from $1.8 million in 1997 to $3.1 million in 1998. As a
percentage of total revenues, research and development expenses decreased from
27% in 1997 to 10% in 1998. The increase in research and development expenses
in absolute dollars was due primarily to increased headcount associated with
customer delivery, new product development and advanced research and
development. The decrease in research and development expenses as a percentage
of total revenues resulted primarily from Divicore's increased revenue base.
Sales and Marketing Expenses. Sales and marketing expenses increased 70%
from $1.2 million in 1997 to $2.0 million in 1998. As a percentage of total
revenues, sales and marketing expenses decreased from 17% to 6%. The increase
in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States and the increased emphasis on enhancing
market awareness. The decrease in sales and marketing expenses as a percentage
of total revenues resulted primarily from Divicore's shift from a retail-
oriented distribution model which required greater advertising expenses and
from Divicore's increased revenue base.
General and Administrative Expenses. General and administrative expenses
increased 173% from $1.7 million in 1997 to $4.7 million in 1998. As a
percentage of total revenues, general and administrative expenses decreased
from 25% to 15%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support Divicore's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to Divicore's increased revenue
base.
Depreciation and Amortization Expense. Divicore recorded depreciation and
amortization expense in 1998 of $0.9 million primarily related to the goodwill
recorded as part of the Viona acquisition. Additionally Divicore wrote off $7.9
million of acquired in-process research and development. See "--Acquired In-
Process Research and Development."
Years Ended December 31, 1996 and 1997
Revenues. Total revenues increased 63% from $4.2 million in 1996 to $6.8
million in 1997. License revenues increased 299% from $0.3 million in 1996 to
$1.3 million in 1997. The increase in license revenues was primarily due to the
addition of a large licensing customer. Services revenues decreased from
$0.5 million in 1996 to $0.1 million in 1997. Hardware revenues increased 60%
from $3.4 million in 1996 to $5.4 million in 1997. The increase in hardware
revenues was primarily due to increased market acceptance of Divicore's
software solutions with supporting hardware platform designs.
Cost of Revenues. Cost of revenues increased 168% from $3.1 million in 1996
to $8.4 million in 1997. The increase in cost of revenues was primarily due to
increased product costs associated with the manufacturing of Divicore's
hardware related products.
Gross Profit. Gross profit decreased from $1.1 million in 1996 to a negative
$1.6 million in 1997. The decrease in gross profit both in absolute dollars and
as a percentage of total revenues was primarily due to the expenses associated
with obsolete inventory and price protection.
Research and Development Expenses. Research and development expenses
increased 77% from $1.0 million in 1996 to $1.8 million in 1997. As a
percentage of total revenues, research and development expenses increased from
25% in 1996 to 27% in 1997. The increase in research and development expenses
in absolute dollars and as a percentage of total revenues was due primarily to
increased headcount associated with customer delivery, new product development
and advanced research and development.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$0.7 million in 1996 to $1.2 million in 1997. As a percentage of total
revenues, sales and marketing expenses remained constant at 17% in 1996 and
1997.
35
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased 43% from $1.2 million in 1996 to $1.7 million in 1997. As a
percentage of total revenues, general and administrative expenses decreased
from 29% to 25%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support Divicore's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to Divicore's increased revenue
base.
Quarterly Results of Operations
The following tables present certain unaudited quarterly consolidated
statements of operations data, both in absolute dollars and as a percentage of
revenues, for the eight quarters ended March 31, 1999. In the opinion of
management, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of Divicore.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License revenues....... $ 405 $ 132 $ -- $ -- $ 833 $1,204 $ 733 $1,985
Services revenues...... 56 7 6 10 154 513 -- 305
Hardware revenues...... 2,834 1,398 612 3,133 3,867 8,091 11,750 8,522
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 3,295 1,537 618 3,143 4,854 9,808 12,483 10,812
Cost of revenues........ 4,347 808 1,811 3,077 3,713 7,413 10,343 7,399
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (1,052) 729 (1,193) 66 1,141 2,395 2,140 3,413
Research and
development............ 432 497 513 498 944 697 982 1,465
Sales and marketing..... 289 262 259 465 476 478 545 1,062
General and
administrative......... 384 378 765 505 1,201 1,318 1,649 837
Depreciation and
amortization........... 12 13 13 15 281 297 313 314
Compensation related to
stock options.......... -- 1,408 -- -- -- -- 139 --
Acquired in-process
research and
development............ -- -- -- -- 7,900 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (2,169) (1,829) (2,743) (1,417) (9,661) (395) (1,488) (265)
Interest expense, net... 31 38 101 127 350 95 150 45
Other income............ 716 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. $(1,484) $(1,867) $(2,844) $(1,544) $(10,011) $ (490) $(1,638) $ (310)
======= ======= ======= ======= ======== ====== ======= ======
As a Percentage of Total
Revenues:
Revenues:
Licensing revenues..... 12.3 % 8.6 % -- % -- % 17.1 % 12.3 % 5.9 % 18.4 %
Service revenues....... 1.7 0.4 1.0 0.3 3.2 5.2 -- 2.8
Hardware revenues...... 86.0 91.0 99.0 99.7 79.7 82.5 94.1 78.8
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 131.9 52.6 293.0 97.9 76.5 75.6 82.9 68.4
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (31.9) 47.4 (193.0) 2.1 23.5 24.4 17.1 31.6
Research and
development............ 13.1 32.3 83.0 15.8 19.5 7.1 7.9 13.6
Sales and marketing..... 8.8 17.0 41.9 14.8 9.8 4.9 4.4 9.8
General and
administrative......... 11.7 24.6 123.8 16.0 24.8 13.4 13.2 7.6
Depreciation and
amortization........... 0.3 0.8 2.1 0.5 5.8 3.0 2.5 2.9
Compensation related to
stock options.......... -- 91.6 -- -- -- -- 1.1 --
Acquired in-process
research and
development............ -- -- -- -- 162.7 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (65.8) (118.9) (443.8) (45.0) (199.1) (4.0) (12.0) (2.3)
Interest expense, net... 0.9 2.5 16.3 4.1 7.2 1.0 1.2 0.4
Other income............ 21.7 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. (45.0)% (121.4)% (460.1)% (49.1)% (206.3)% (5.0)% (13.2)% (2.7)%
======= ======= ======= ======= ======== ====== ======= ======
</TABLE>
36
<PAGE>
Hardware revenues decreased in the quarters ending September 30, 1997 and
December 31, 1997 from prior periods due to Divicore's transition away from
distributors and retail customers towards top tier personal computer
manufacturer customers. License revenues increased $1.3 million in the quarter
ending March 31, 1999 from the immediately preceding quarter due to the
Company's transition towards a licensing model. License revenues increased $0.4
million in the quarter ending September 30, 1998 primarily due to revenues from
a large up-front license fee. Hardware revenues decreased $3.2 million in the
quarter ending March 31, 1999 from the immediately preceding quarter primarily
due to Divicore's transition away from a hardware sales model towards a
licensing model. Cost of revenues increased $1.0 million in the quarter ending
December 31, 1997 from the immediately preceding quarter due to the write-off
of inventory and price protection associated with Divicore's transition away
from the retail distribution channel. Gross profit decreased by $0.3 million in
the quarter ending December 31, 1998 from the immediately preceding quarter.
The decline, both in absolute dollars and as a percentage of revenues, was
primarily due to large upfront license fees received in the preceding quarter.
In April 1998, Divicore expensed $7.9 million of the purchase price as acquired
in-process research and development in connection with the acquisition of
Viona. The increases in general and administrative expense beginning in the
quarter ending June 30, 1998 are primarily the result of increased personnel,
higher facility costs and professional fees to support the growth of Divicore's
infrastructure. General and administrative expenses declined by $0.8 million
for the quarter ended March 31, 1999 as compared to the immediately preceding
quarter primarily due to reclassification of overhead costs in order to more
accurately reflect departmental reporting and one time fees for professional
services. The increase in depreciation and amortization expense beginning in
the quarter ending June 30, 1998 is the result of the amortization of goodwill
and other intangible assets in connection with the acquisition of Viona in
April 1998. Compensation expense related to stock options in the quarters
ending September 30, 1997 and December 31, 1998 relates to stock options
granted to certain employees of Divicore at less than the estimated fair market
value of Divicore's common stock on the date of grant.
Divicore's business is subject to a variety of risks, including but not
limited to: variations in demand for Divicore's products; the timing of sales
of Divicore's products and the timing of releases of new personal computer
systems, consumer electronics devices and semiconductors that incorporate
Divicore's products; delays in introducing new products; changes in Divicore's
pricing policies or the pricing policies of Divicore's competitors; the timing
and accuracy of royalty reports received from Divicore's customers and the
execution of individual contracts, particularly large contracts that materially
affect Divicore's operating results in a given quarter; changes in the usage of
digital media; Divicore's ability to develop and attain market acceptance of
enhancements to Divicore's CineMaster products; new product introductions by
competitors; the mix of license, services and hardware revenues; the mix of
domestic and international sales; costs related to acquisitions of technologies
or businesses; Divicore's ability to attract, integrate, train, retain and
motivate a substantial number of sales and marketing, research and development,
administrative and product management personnel; Divicore's ability to expand
its operations; and global economic conditions as well as those specific to
personal computer, consumer electronics, peripherals and semiconductor
manufacturers and other providers of digital video and audio stream management
solutions. If any of these risks were to materialize, Divicore's quarterly and
annually operating results could be materially adversely affected.
Acquired In-Process Research and Development
In April 1998, Divicore completed the acquisition of Viona, a company
specializing in the development of digital video technology. Divicore paid $6.1
million in cash, of which $2.6 million was paid at closing, $2.1 million will
be paid during 1999, and $1.4 million will be paid in equal installments at the
end of each of the next three fiscal years, issued 1,204,820 shares of
Divicore's common stock valued at $4.8 million and incurred transaction costs
of $0.8 million. For accounting purposes, payments due in future periods have
been discounted.
The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process
research and development technology, which resulted in a charge of
approximately $7.9 million to Divicore's operations in April 1998. The in-
process research and development
37
<PAGE>
technology was valued using a cash flow model, under which projected income and
expenses attributable to the purchased technology were identified, and
potential income streams were discounted using a 30%-35% discount rate for
risks, probabilities and uncertainties, including the stage of development of
the technology, viability of target markets and other factors.
As of the acquisition date, Viona was conducting significant ongoing
research and development into five new software and hardware products including
enhancements to the existing digital video and audio system solutions
previously developed by Divicore. At the date of acquisition, these projects
had not reached technological feasibility and there was no alternative future
use for them. The five research and development projects included:
. CineMaster LC Hardware DVD Decoder, a single circuit board or card
that can be added to a personal computer to allow the personal
computer to process digital video signals. At the time of the
acquisition, Viona was conducting research and development to
integrate this product into a single chip-based design in an effort
to reduce manufacturing costs and to improve playback performance
quality. This research and development project had completed only
alpha testing and was approximately 80% complete at the date of
acquisition. Viona had incurred approximately $117,000 of research
and development expense and estimated that $35,000 would be required
to complete the development of the project. Development was
completed during 1998.
. CE DVD Set-top Player/Portable Player, a DVD playback set-top
reference design for equipment manufacturers which was expected to
provide full DVD playback capabilities such as fast forward,
rewinding, multi-language and surround sound audio. At the time of
the acquisition, this project had not yet completed alpha testing
and there was significant uncertainty of completion. Divicore
estimated that the project was approximately 5% complete. Viona had
incurred approximately $30,000 of research and development expense
and estimated that $500,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. DVD Software Encoder, a software solution to enable the processing
of digital video signals which is designed to eliminate the need for
a DVD encoder chip or circuit board by utilizing software to record
DVD and video streams on a personal computer. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. Divicore estimated
that the project was approximately 40% complete. Viona had incurred
approximately $121,000 of research and development expense and
estimated that $203,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Hardware Decoder, a circuit board or card that could enable
personal computers to process HDTV signals. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. Divicore estimated
that the project was approximately 35% complete. Viona had incurred
approximately $63,000 of research and development expense and
estimated that $111,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Software Decoder, a software solution designed to allow a
personal computer to process HDTV signals without the need for a
hardware solution. At the time of the acquisition, this project had
not yet completed alpha testing and there was significant
uncertainty of completion. Divicore estimated that the project was
approximately 15% complete. Viona had incurred approximately $15,000
of research and development expense and estimated that $150,000
would be required to complete the development of the project.
Development is expected to be completed within the next twelve
months.
38
<PAGE>
The efforts required to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can meet their design requirements, including function, features
and technical performance requirements.
Divicore based its determination of the acquired in-process technology
allocation on recently issued guidance by the Securities and Exchange
Commission and considered such factors as degree of completion, technological
uncertainties, costs incurred and projected costs to complete. Acquired in-
process technology projects continue to progress, in all material respects,
consistent with management's original assumptions used to value the acquired
in-process technology. See Note 4 of Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Since inception, Divicore has financed its operations primarily through the
issuance and sale of debt and equity securities to investors. As of March 31,
1999 Divicore had approximately $2.2 million in cash and cash equivalents.
Net cash provided by operating activities for the three months ended March
31, 1999 was $0.9 million. Net cash used by operating activities for the three
months ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $2.1
million, $2.0 million, $2.5 million and $9.7 million, respectively. Cash used
in operating activities in each of these periods was primarily the result of
net losses, adjusted for non-cash items, including in 1997 and 1998
compensation expense; in 1998, acquired in-process research and development
expense; and in 1998 and the three months ending March 31, 1999, depreciation
and amortization expense primarily related to the goodwill recorded with the
acquisition of Viona, offset by increases in accounts receivable and increases
in inventory associated with the increase in hardware sales.
Net cash provided by investing activities for the three months ended March
31, 1999 was $8,000. Net cash used by investing activities for the three months
ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $0.06 million,
$0.1 million, $0.03 million and $4.0 million, respectively. Cash used in
investing activities in each period consisted primarily of net purchases of
furniture and equipment. In 1998, cash used in investing activities also
included the costs associated with the Viona acquisition.
Net cash provided by financing activities for the three months ended March
31, 1998 and 1999 and the years ended 1996, 1997 and 1998 was $4.2 million,
$0.3 million, $2.1 million, $3.0 million and $14.2 million, respectively. Cash
provided by financing activities was primarily attributable to net proceeds
from the issuance of debt and equity securities to investors.
As of March 31, 1999, the Company's principal commitments consisted of
obligations outstanding under equipment leases and notes payable to partially
fund its operations and capital purchases. The equipment leasing arrangements
consist primarily of Divicore paying rental fees to third party leasing
providers at interest rates between 15% to 18%, that maintain title to the
leased equipment. In most cases, there are no obligations for Divicore to
purchase the equipment at the end of the term. Although the Company has no
material commitments for capital expenditures, it anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. In addition,
Divicore has approximately $2.5 million at March 31, 1999 of payments due over
the next two years to the former owners of Viona.
As of March 31, 1999, Divicore had a $5 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable and inventory, as defined in the
credit documentation, and bear interest at a rate of prime plus 1% per annum
(8.75% at December 31, 1998). In addition, Divicore must comply with certain
financial covenants. At March 31, 1999, approximately $1.3 million was
outstanding and $1.7 million was available under the line of credit. Divicore
was not in compliance with all material covenants under the agreement, but has
received a waiver from the
39
<PAGE>
lender. This line of credit expires in July 2000. Silicon Valley Bank has
senior security interest in substantially all of the assets of Divicore.
Divicore presently anticipates that the net proceeds from this offering,
together with existing sources of liquidity and cash anticipated to be provided
by operations, if any, together with borrowings available under its line of
credit, will be adequate to meet its cash needs for at least the next twelve
months.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
Although Divicore's products, intellectual property and related designs have
no inherent time or date function, Divicore initiated a comprehensive
assessment of its Year 2000 readiness in March 1999. In parallel, Divicore has
recently started to implement programs to make both its information technology
and its non-information technology processes Year 2000 compliant. In addition,
Divicore has recently replaced its internal computer systems and operating and
applications software. Each of the suppliers of these systems and software has
indicated to Divicore that it believes its products are Year 2000 compliant.
Divicore expects to complete changes to critical systems by the third quarter
of calendar year 1999. Divicore believes that it has allocated sufficient
resources for its Year 2000 compliance efforts.
To date, Divicore has not incurred any material expenditures in connection
with identifying, evaluating or addressing Year 2000 compliance issues. Most of
Divicore's expenses have related to, and are expected to continue to relate to,
the operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, Divicore does
not possess the information necessary to estimate the potential costs of
revisions to its systems should such revisions be required or the replacement
of third-party software, hardware or services that are determined not to be
Year 2000 compliant. Although Divicore does not anticipate that such expenses
will be material, such expenses, if higher than anticipated, could harm its
business.
Moreover, Divicore may discover Year 2000 compliance problems in its systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into Divicore's information systems may need
to be revised or replaced, all of which could be time-consuming and expensive.
The failure of Divicore to fix or replace its third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions.
As discussed above, Divicore is engaged in an ongoing Year 2000 assessment
and has not yet developed any contingency plans. The results of Divicore's Year
2000 assessment will be taken into account in determining the nature and extent
of any contingency plans.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Positions, or SOP, No. 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. The adoption of SOP No. 98-1 did not have
a material effect on Divicore's capitalization policy.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all
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start-up costs that were capitalized in the past must be written off when SOP
No. 98-5 is adopted. Divicore has expensed these costs historically, therefore,
the adoption of SOP No. 98-5 did not have a material impact on Divicore's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because Divicore does not
currently hold any derivative instruments and does not engage in hedging
activities, Divicore expects that the adoption of SFAS No. 133 will not have a
material impact on its financial position or results of operations. Divicore
will be required to implement SFAS No. 133 for the year ending December 31,
1999.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. Divicore does not expect the adoption of SOP 98-9 to have a material
effect on its results of operations or financial condition.
Qualitative and Quantitative Disclosures About Market Risk
Divicore develops products in the United States and sells such products in
North America, Asia and Europe. As a result, Divicore's financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. As all sales are currently made in
U.S. dollars, a strengthening of the dollar could make Divicore's products less
competitive in foreign markets. Divicore does not use derivative instruments to
hedge its foreign exchange risk. Divicore's interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of its investments are in short-term instruments. Due to the nature of
Divicore's short-term investments, Divicore has concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.
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BUSINESS
Divicore designs, develops, licenses and markets innovative core-based
modular software solutions that enable digital video and audio stream
management in personal computer systems and consumer electronics devices.
Divicore also licenses supporting hardware designs to selected customers and
provides customization services and customer support. Divicore's solutions
enable decoding (playback) and encoding (recording) of multimedia formats such
as digital versatile disk, or DVD; direct broadcast satellite, or DBS, or its
European counterpart, digital video broadcasting, or DVB; and high definition
television, or HDTV, on existing personal computer and consumer electronics
platforms. Divicore's digital solutions incorporate industry standards for
video and audio compression, independent of operating systems and silicon
components, and are built using the same powerful, easily customizable and
modular software architecture. As digital technology continues to evolve and
standards change, Divicore can add new modules to its software to provide
additional functionality without requiring the altering of existing core
components of its digital solution. Moreover, Divicore's modular approach
provides its customers with enhanced flexibility and adaptability that enables
the rapid introduction of new products to market. Divicore intends to leverage
the flexibility of its products to capitalize on the shift from analog to
digital content across the media and entertainment industries.
Divicore's products focus on two important markets, the personal computer
market and the consumer electronics market. Divicore's products integrate the
same high-performance software architecture and code base across multiple
applications in each market. This allows personal computer and consumer
electronics manufacturers to achieve faster time-to-market, to cross-market
their product offerings, to develop a customizable, consistent look and feel
across product lines and to reduce technical support costs. In the personal
computer market, Divicore's current products consist of high-performance
digital video and audio decoding and encoding solutions. In the consumer
electronics market, Divicore's current product is a high-performance software
solution with multiple supporting hardware platform designs that provides
digital audio and video stream management. Divicore's digital solutions provide
personal computer and consumer electronics manufacturers with a foundation to
support future components, operating systems and functionalities in a rapid and
cost effective manner.
Our DVD solutions are incorporated into the products of seven of the top ten
personal computer manufacturers, based on total unit sales. Personal computer
and peripherals manufacturers currently shipping Divicore's products include
ATI Technologies Inc., Compaq Computer Corporation, Dell Computer Corporation,
Fountain Technologies, Inc., Fujitsu Microelectronics, Inc., Gateway 2000,
Inc., Hewlett-Packard Company, Micron Electronics, Inc. and Packard Bell NEC
Europe, Consumer electronics manufacturers that have agreed to incorporate
Divicore's technology include Tottori-Sanyo Electric Co., Ltd. (a subsidiary of
Sanyo Electronics Corporation, Inc.) and Yamaha Corporation of America.
Divicore also has strategic relationships with ATI Technologies, Dolby
Laboratories, Inc., Intel Corporation and STMicroelectronics.
Industry Background
Historically, the personal computer and consumer electronics industries
addressed video and audio content using different technologies. The personal
computer developed around digital technology using the central processing unit,
or CPU, which was initially expensive and unable to simultaneously run the
operating system and manipulate video and audio inputs at satisfactory
performance levels. As a result, digital video content was managed by a stand-
alone semiconductor device or module. In contrast, the consumer electronics
industry evolved using lower cost analog solutions that were able to provide
acceptable performance, but were typically passive and did not permit the users
to edit or enhance the content. Advances in semiconductor technology have
dramatically lowered the price of high performance microprocessors, allowing
personal computers and consumer electronics devices to employ software
solutions to manage video and audio streams in a digital format without
overburdening their CPUs. Moreover, today, when evaluating a digital personal
computer or consumer electronics device, consumers are increasingly demanding
digital video and audio capabilities such as
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3-D graphics, editing and compression. Analog formatted devices cannot provide
these capabilities. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrums and
the ability to deliver customized and interactive services. As a result, a
growing number of personal computer and consumer electronics manufacturers are
storing, accessing and playing video and audio streams in a digital format.
A number of trends are accelerating the migration of manufacturers from
analog to digital technology, including advances in technology, the evolution
of standards, government and private initiatives and the increasing
availability of content.
. Advances in Technology. In the past, multiple silicon devices were
needed to process digital video and audio streams. As silicon
technology progressed, in many instances one such device was needed.
Today, as microprocessor computing speeds continue to increase,
software-only solutions are capable of providing video and audio
stream management at a lower cost and at a performance level
indistinguishable from dedicated silicon approaches.
. Evolution of Standards. Historically, a significant barrier to the
growth of digital video and audio technology was the lack of widely
accepted technological standards. Today, industry participants have
adopted a video compression standard known as MPEG-2 that enables
video and audio compression for digital transmission and storage.
MPEG-2 is currently deployed as the DVD solution in personal
computers and DVD players and has been adopted as the standard for
digital television, or DTV, and HDTV. In addition, Dolby Digital,
formerly known as AC-3, designed by Dolby Laboratories, has emerged
as an industry standard for audio compression.
. Government and Private Initiatives. A number of government and
private initiatives have also emerged to fuel the shift from analog
to digital technology. For example, the cable television industry
has adopted the "OpenCable" standard under which digital cable boxes
will be manufactured and sold through retail channels similar to
personal computers and television sets, thereby creating a new
product market. Also, under the Telecommunications Act of 1996, all
broadcasters are required to change their broadcasting formats to
digital and to cease carrying analog broadcasts by 2006. This will
require every owner of an analog television set to purchase either a
new digital television set or a digital converter box in the next
seven years.
. Increasing Availability of Content. The introduction of many forms
of stand-alone content for digital media will lead consumers to shop
for devices, such as DVD players and recorders, digital cable set-
top devices and digital television sets, on which such content can
be seen, heard, edited and stored. Already, there are over 2,300
movie titles available in DVD format. The recording industry has
adopted the DVD format to be used in next-generation audio devices.
Cable television providers have adopted content strategies intended
to capitalize on the trend toward digital technology through
increased channel capacity and higher-resolution, interactive
digital programming.
Advances in microprocessor speed and capacity coupled with the shift to
digital technology are leading the personal computer and consumer electronics
markets to converge at an accelerating pace. As the personal computer and
consumer electronics industries converge, two major trends have emerged. First,
the integration of video and audio streams with digital technology is
increasing the complexity of product design. Second, products have shorter life
cycles as a result of rising digital processing capabilities, falling prices of
semiconductors and rapidly improving software. In the past, consumer
electronics products relied on multiple special-purpose silicon devices to
provide the necessary system performance, with each device performing a
particular function such as video or audio decoding. Similarly, the personal
computer industry has historically been driven by the latest in semiconductor
innovation and has timed product introductions around microprocessor advances,
which typically have occurred twice a year. These dedicated silicon strategies
carried two major risks: high product development cost and premature product
obsolescence. The risk of high product development cost came from the time and
effort required to adapt a silicon-based solution to address each new
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feature or product platform. The risk of product obsolescence resulted from the
fixed-function nature of a dedicated silicon solution and the inability of
manufacturers to rapidly change product offerings in light of changes in
consumer preferences for applications or functionality. As the speed of
microprocessors increased, the ability to shift more and more complex tasks
from dedicated silicon devices to software increased. As a result, personal
computer and consumer electronics manufacturers are now able to use digital
solutions with a more-adaptable and inexpensive software-only format, giving
them the flexibility to innovate without the risk of quick obsolescence.
Divicore believes that personal computer and consumer electronics
manufacturers are seeking to leverage their expertise and brand recognition in
order to deliver digital products that provide a new set of choices for
consumers in new markets. For example, all existing television sets, video
cassette recorders, stereos, set-top boxes and personal computers are
candidates for upgrade to digital technologies. In order to enter into these
new markets and capitalize on upgrade cycles for these products, personal
computer and consumer electronics manufacturers are seeking new digital product
solutions that permit rapid time-to-market with the latest features and
functionality. Divicore believes that these product solutions must be
extensible and have a customizable architecture that allows product
differentiation and facilitates migration across product lines and markets. In
particular, in order to keep pace with the rapidly-changing product cycles of
personal computer and consumer electronics manufacturers and be cost effective,
these product solutions must rely on platform-independent software and not on
dedicated silicon device designs and their associated operating systems.
The Divicore Solution
Divicore designs, develops, licenses and markets innovative core-based
modular software solutions and supporting hardware designs that enable digital
video and audio stream management in personal computer systems and consumer
electronics devices. Divicore's solution contains high-performance digital
video and audio decoding and encoding engines that implement complex
synchronization and optimization algorithms, which, in turn, enable decoding
and encoding of media formats such as DVD, DBS/DVB and HDTV on existing
personal computer and consumer electronics platforms. Divicore's digital
solutions incorporate industry standards for video and audio compression and
are independent of operating systems and silicon components. By using
Divicore's solution, its customers can provide various video and audio
processes normally completed by dedicated silicon devices with software modules
at a fraction of the cost.
Divicore believes that its digital solutions provide a number of significant
advantages for personal computer and consumer electronics manufacturers.
Divicore's personal computer and consumer electronics products are built using
the same powerful, easily customizable and modular software architecture. This
modular approach provides Divicore's customers with enhanced flexibility,
enabling them to rapidly introduce products to market. In addition, using
Divicore's software solutions frees these customers from semiconductor design
cycles. As digital technology evolves and standards change, Divicore can add
new modules to its software to address the changes without needing to alter
existing components of its digital solution.
Examples of how Divicore's digital solutions are being implemented include:
. In the personal computer market, Dell Computer uses Divicore's DVD
decoding solutions in all of its DVD-enabled desktop personal
computers. Dell Computer has migrated Divicore's solution across
multiple product cycles through Divicore's customization and
optimization services, even when the different cycles involve
changing graphics requirements and different microprocessors. The
Divicore digital solution allows Dell Computer to use the same user
interface in each of these DVD-enabled product lines while
maintaining high quality video and audio performance and rapid time-
to-market delivery.
. In the consumer electronics market, Sanyo Electronics, by using
Divicore's software solution and supporting hardware platform
design, can now offer high quality video and audio performance
together with significant cost savings in its DVD players.
Divicore's technology is designed to enable Sanyo Electronics to
migrate this platform to accommodate additional technologies such as
DBS/DVB, DTV and HDTV.
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Strategy
Divicore's strategy is to be the leading global provider of digital video
and audio solutions to personal computer and consumer electronics
manufacturers. Divicore believes that the most effective way to achieve its
strategy is to become an intellectual property company that licenses its
technology to manufacturers that will, in turn, use Divicore's solutions to
penetrate very large personal computer and consumer electronics markets. Key
elements of Divicore's strategy include:
Grow License Business Model Among Top Tier Personal Computer and Consumer
Electronics Manufacturers. Divicore's strategy is to license its software
solutions and supporting hardware designs to leading personal computer and
consumer electronics manufacturers. Divicore believes that the success of its
manufacturing customers in the digital video and audio markets will continue to
validate its technology. Divicore intends to leverage its existing customer
relationships into additional product lines and to seek out additional personal
computer and consumer electronics manufacturers as customers. Divicore believes
that its license model avoids the pitfalls of manufacturing, storing and
distributing hardware-based digital solutions while simultaneously increases
profitability. Divicore also believes that by developing customized solutions
in partnership with its customers, it will avoid commoditization of its
products.
Extend Technological Leadership. Divicore has established its line of
CineMaster products as a leading DVD solution for the personal computer market.
Divicore's experience in providing digital video and audio technologies has
enabled it to stay at the forefront of the transition to digital technologies.
For example, Divicore believes it was the first company to display a working
DVD decode solution on a personal computer, the first company to demonstrate an
HDTV decode solution on a personal computer and the first company to display an
all-software HDTV decode solution. Divicore intends to continue to invest in
research and development both internally and in conjunction with its customers
and strategic partners in order to maintain its technological leadership,
improve its current product offerings and leverage its proprietary
technologies.
Leverage Technology and Expertise into New Markets. Divicore intends to
leverage its modular software solutions and DVD expertise into multiple
consumer electronics markets, such as the emerging DTV, HDTV, DBS/DVB and
digital cable markets. Divicore believes that these markets will undergo
dramatic growth in the next few years and that the extensibility of its
products across multiple digital markets will provide it with an advantage over
competitors focused on a single product, technology or market. In the future,
Divicore plans to supplement its distribution channel by establishing an
Internet presence to maximize direct contact with its customers, facilitate
electronic sales of its products and sell associated products directly to end
users.
Focus on Strategic Relationships. Divicore's solutions are incorporated into
the products of seven of the top ten personal computer manufacturers and two
leading consumer electronics manufacturers. In addition, Divicore has
established strategic relationships with leading technology companies, such as
ATI Technologies, Dolby Laboratories, Intel and STMicroelectronics. Divicore
believes these industry relationships better position it to stay abreast of
industry trends, respond to the needs of its customers, provide input into
industry standards and improve its product planning process. Divicore intends
to continue to develop its existing strategic relationships and develop new
strategic relationships in targeted areas.
Technology
Divicore has designed its digital video and audio stream management
solutions to be independent of the hardware platform on which they run.
Divicore's designs are based on an object-oriented modular architecture,
whereby each of the technical standards that are used for various digital media
is addressed through a separate module of Divicore's software. For example,
compliance with MPEG-2 and Dolby Digital has been achieved through completely
discrete components of Divicore's software that can be "plugged in" to each
other or to other modules addressing other standards or features of Divicore's
products. Furthermore, each of these modules can address particular
semiconductors or central processing units (CPUs) as needed. As a result,
Divicore's architecture allows personal computer and consumer electronics
manufacturers to choose different
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combinations of software and hardware configurations for their products while
maintaining a consistent look and feel.
Divicore's module-based approach to its digital solutions is designed to
provide flexibility and adaptability as relevant technologies evolve and
standards change. For example, as new digital technology develops, whether
hardware or software-based, Divicore can add new modules to address the new
technology without altering other components of its digital solution. In
addition, as the processing speeds and capabilities of personal computers and
graphics cards improve, hardware-based modules can be replaced with software
modules, again without requiring the alteration of other components of
Divicore's overall architecture. The same flexibility also applies to the user
interface and storage modules. For example, as new platforms and operating
environments arrive, only the interface modules will need to be altered to
adapt.
Divicore identifies emerging technologies necessary for future platforms
which address various media sources such as those shown below. Divicore then
applies its high-performance modular software solution to manage these sources
in a digital format, enabling manufacturers to support these technologies in
various devices:
[Graphic appears here]
Description of graphic on page 46
The graphic consists of three columns of boxes with blocks of text inside of
them. The first column has four small boxes, the second column has one large
box and the third column has two medium-sized boxes. Arrows point from each box
in the first column to the box in the middle column and from the box in the
middle column to each of the two boxes in the third column.
Over the first column is the word "Sources." The words appearing in the first
box in the first column are "Recorded Media" (in bold) and below the words
"DVD, DVD-ROM, CD, CD-ROM, Video CD." The words appearing in the second box in
the column are "Broadcast Media" (in bold), and below the words "Digital
Satellite, DTV, HDTV, Digital Cable." The words appearing in the third box in
the first column are "Legacy Media" and below the words "TV, Analog Cable, VCR,
Analog Inputs." The words appearing in the fourth box in the first column are
"Network Media" and below the words "Streaming MPEG Video and Digital Audio."
Over the second column are the words "Divicore Solution." The words appearing
in the single box in the second column are "Software Algorithms and IP Cores,"
"Software Drivers," "Hardware Designs," "Applications Programming Interfaces"
and "End User Applications." All of these words are in large bold print and
each phrase appears over the next.
Over the third column is the word "Devices." The words appearing in the first
box in the third column are "PC Products," (in bold). Below are the words
"Desktop and Laptop Systems Incorporating:" (in bold) and below this (not in
bold) are the words "DVD, HDTV, Digital Satellite, Digital Cable, Digital VCR."
The words appearing in the second box in the third column are "CE Products" (in
bold) below which are the words "DVD Players, DVD portable players, DVD game
consoles, HDTV decoder boxes, Digital Satellite set-tops, Digital Cable set-
tops, Digital VCRs."
. Software Algorithms and IP Cores
Software algorithms are designed to work with multiple
microprocessors, operating environments or semiconductor devices.
They exist in high level language forms but perform silicon level
functions such as video decoding and encoding.
. Software Drivers
Software drivers control the core software or hardware
implementations. They are designed for specific operating systems
and typically run in Microsoft operating environments; nonetheless,
the core design allows for porting to other environments. Software
drivers are the "middleware" that connects the algorithms of
Divicore's solution to the operating environments.
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. Hardware Designs
Hardware designs are developed with a modular approach to allow for
flexible silicon device selection and adaptation to industry
standard interfaces. Divicore licenses its hardware designs to
enable its software licensees to deliver a complete product.
. Application Programming Interfaces
Application programming interfaces, or APIs, allow for the use of
Divicore software drivers or hardware components by third party
applications as well as independent application development by
Divicore teams. These tools are developed around multiple industry
standards and interfaces to allow for full-feature access.
. End User Applications
End user applications are delivered to Divicore customers as
complete multi-language installations which provide customizable,
full-featured graphical user interfaces.
The diagram below represents the digital media flow through the Divicore
solution:
[Graphic appears here]
Description of graphic on page 47
The graphic consists of a flowchart of boxes with arrows pointing from each box
toward one or more boxes below or to the right. There is a column of four boxes
on the left under the word "Sources." These boxes are the same as appear in the
first column of boxes in the graphic on page 46 and the same words appear
inside each of them, respectively. To the right of this column is a group of
boxes encircled by a dotted rectangular line with the words "Divicore Solution"
appearing above and outside of this dotted line. All of the boxes are inside
the dotted line except the four boxes in the "sources" column
The four boxes in the "Sources" column on the left each point to a single long
rectangular box inside of which are the words "Source Management." This box
points to another long rectangular box inside of which are the words "Media
Router." Below this box is a small square box inside of which are the words
"Media Caching." An arrow points to and from this box and the "Media Router"
box. Arrows point from the "Media Router" box to each of two small square boxes
inside of which are the words "Media Decode" and "Convergence User Interface"
respectively. Below the "Convergence User Interface" box is a small square box
inside of which are the words "Intelligent Agent." An arrow points to and from
this box and the "Convergence User Interface" box. Arrows also point from each
of the "Media Decode" and "Convergence User Interface" boxes to a small square
box inside of which are the words "User Presentation."
. Source Management
Divicore's digital video and audio source management solution starts
by controlling and decoding multiple video and audio streams from
either digital or digitally converted analog sources.
. Media Router/Media Caching
After the streams are received and converted, they are directed via
the "Media Router" module to either store the streams for future
playback using the "Media Caching" module, or deliver them to the
media decoder for immediate presentation.
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. Media Decode/Convergence User Interface/Intelligent Agent
Upon delivery, the "Media Decode" module translates the compressed
data into video and audio streams. At this point, Divicore's
"Convergence User Interface" module allows users to control the
final presentation of the stream as well as to provide a customized
look and feel. Divicore plans to add intelligent agents that would
enable user habit-based automatic programming and simultaneous
playback and recording capabilities.
. User Presentation
As a final step, Divicore's "User Presentation" module converts the
audio and video streams to the proper output format for presentation
on multiple devices including computer monitors, television sets and
speakers.
Products and Services
Products
Divicore's products incorporate its core-based, high-performance,
customizable, modular software solutions and supporting hardware designs to
enable digital video and audio playback and recording within the personal
computer and consumer electronics industries. Divicore currently offers two
complete DVD solutions for personal computers, a DVD player solution for
consumer electronics products and has several products under development for
other digital video and audio applications. Divicore's current products
include:
. Hardware CineMaster 98, a software DVD solution with a supporting
hardware platform design that is incorporated into the systems of
three major personal computer manufacturers to enable DVD playback
in their products. A Dell Computer system incorporating Hardware
CineMaster 98 won the Editors' Choice Award for high-end personal
computers in December 1998 in both PC World and PC Magazine. Both
awards cited the quality of the DVD playback in general and
Divicore's solution in particular. Historically, Divicore derived
hardware revenue from, and was responsible for, the manufacture and
delivery of this product. In early 1999, Divicore began to contract
with third party manufacturers to manufacture and deliver this
product directly to Divicore's customers. Divicore will receive a
license fee for each unit sold.
. Software CineMaster 98, a software-only DVD solution that has been
licensed to seven of the top ten personal computer manufacturers to
enable DVD playback in their products. Software CineMaster 98 is
incorporated into the operating system of personal computers or sold
separately as part of an after-market solution bundled with a
graphics card. Compaq Computer and Gateway systems incorporating
Software CineMaster 98 won the PC Magazine Editors' Choice Award in
March 1999 and December 1998, respectively. These awards cited both
the quality of the DVD playback in these systems and Divicore's
Software CineMaster 98 product as responsible for DVD decoding in
these systems. Divicore receives a per unit license fee from
manufacturers for each system or device sold by them which
incorporates this product.
. CineMaster CE, a software solution with multiple supporting hardware
platform designs that enables DVD playback across a variety of
consumer electronic products. CineMaster CE was developed through
Divicore's strategic relationship with a top tier semiconductor
manufacturer to whom Divicore has licensed the product on a
nonexclusive basis. CineMaster CE includes a complete DVD set-top
reference design, including lower level software, a complete
hardware design and a front-end graphical user interface. CineMaster
CE was introduced in late 1998 and has already achieved design wins
from Sanyo Electronics and Yamaha. Divicore receives a per unit
license fee for each microprocessor that incorporates its technology
in addition to the license fee it receives on a per unit basis from
the consumer electronics device manufacturer.
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Services
Divicore's engineers offer customization of key components and functionality
of Divicore's products. These customization services consist primarily of
services that embed Divicore's core technology into components of other
vendors' solutions and modify existing user interface designs. Divicore also
provides broad customer service capabilities, which are necessary to support
the documentation and help file requirements of rapidly changing software.
Divicore's extensive customer service, customization and support capabilities
have differentiated Divicore from its competition and allowed for its success
with top tier personal computer and consumer electronics manufacturers.
Markets and Applications
Over the next ten years, Divicore expects the consumer electronics market to
experience a significant upgrade cycle as analog devices such as VCRs, set-top
cable boxes, audio players and televisions are replaced with digital devices.
Divicore believes its digital video and audio solutions will enable personal
computer and consumer electronics manufacturers to provide the next generation
of digital devices required in this upgrade cycle. A few of the current and
future applications for these devices are the following:
Digital Versatile Disc. DVD is the next generation of five-inch optical disc
technology. A DVD is the same size as a compact disc but holds up to twenty-
five times more data and is up to nine times faster. DVD drives are also
"backward-compatible" with compact disc drives. This increased capacity allows
a DVD to store both high-quality digital video and audio and positions DVD as
the natural successor to compact discs, especially in home application segments
such as personal computers, video entertainment and video game consoles. As
this transition occurs and rental markets, software developers and hardware
vendors embrace the new technology, the DVD market is expected to experience
rapid growth. International Data Corporation predicts that the number of DVD
ROM units sold worldwide will grow from 6.1 million units in 1998 to
19.2 million units in 1999 and 97.4 million units in 2002, representing a
compound annual growth rate of 100%. Divicore is currently shipping various
products for the decoding and playback of DVD titles on a personal computer,
including a software-only solution and a software solution with a supporting
hardware platform design. Divicore also offers a software solution with
multiple supporting hardware designs for DVD playback on consumer electronics
platforms and is developing a software-only DVD encoding solution that enables
the recording of video and audio streams in the DVD format.
Digital Television. A key strategy of Divicore is to pursue the DTV market,
which Divicore expects to be the next major technological advancement in home
electronics. According to The Yankee Group, there is an installed base of 250
million analog television sets in the United States alone that will ultimately
require a separate set-top box or upgrade to accommodate digital technologies.
Digital broadcast television was first successfully launched in the United
States in 1996 via DBS, with DBS now delivering direct broadcast television to
over five million households today. DTV has also begun to move into the large
over-the-air market and by the end of 1999, there is expected to be one digital
broadcast station in each of the top ten U.S. markets. Under the
Telecommunications Act of 1996, all broadcasts must be in a digital format by
2006. Divicore is currently developing a software-only solution and a software
solution with a supporting hardware platform design that enable the viewing of
DTV streams on a personal computer. Divicore is also developing a software
solution with multiple supporting hardware designs for DTV viewing on consumer
electronics platforms.
Digital Cable. In an effort to deliver more channels and services, including
online and interactive services, cable providers are beginning to upgrade
analog cable boxes with digital boxes. For example, Tele-Communications, Inc.
and eight other multiple cable system operators announced in January 1999 the
purchase of 15 million digital cable set-tops from General Instrument
Corporation. Divicore has not shipped any digital cable products to date, but
is developing a software-only solution and a software solution with a
supporting hardware platform design that will enable the viewing of digital
cable television streams using a personal computer or digital cable set-top
device.
49
<PAGE>
Sales and Marketing
Divicore's sales and marketing activities are focused on establishing and
maintaining license arrangements with personal computer, peripherals, consumer
electronics and semiconductor manufacturers. Divicore licenses its digital
solutions on a non-exclusive worldwide basis to personal computer, peripherals
and consumer electronics manufacturers which sell products incorporating these
technologies to end users. Divicore also licenses its digital solutions on a
non-exclusive worldwide basis to semiconductor manufacturers which incorporate
Divicore's technology in products for personal computers and consumer
electronics devices.
Divicore sells its digital solutions to personal computer manufacturers in
the United States and Europe through its direct sales force, and to personal
computer manufacturers in Japan through an independent sales representative.
Divicore is beginning to market its digital solutions to consumer electronics
manufacturers. Sales to these manufacturers will be managed domestically and in
Europe through its direct sales force and in Japan through a strategic sales
partner.
Divicore establishes strategic relationships with peripherals and
semiconductor manufacturers in order to establish Divicore's core-based modular
software solution as the standard of the digital video and audio stream
management industry. In addition to its strategic relationships with
semiconductor manufacturers such as STMicroelectronics, Divicore works closely
with major software and hardware providers such as Advanced Micro Devices,
Inc., ATI Technologies and Intel in designing its digital solutions so that its
final product will interact smoothly with their software and hardware
platforms. Divicore also maintains close relationships with a wide variety of
graphics card vendors to maximize its product flexibility and support. Divicore
works closely with its customers to anticipate market demand and user
requirements and to maximize consumer acceptance and long-term viability of its
solutions. Divicore intends to supplement its distribution channel in the
future by establishing an Internet presence to maximize direct contact with its
customers, facilitate electronic sales of its products and sell associated
products directly to end users.
Divicore participates in industry conferences to market and demonstrate its
technology and distributes quarterly press kits to disseminate information
regarding its latest advances. Divicore also participates in consortia which
meet to establish standards for digital media.
Customers
Divicore's typical customers are personal computer, consumer electronics,
peripherals and semiconductor manufacturers that benefit from a software-only
or combination software and hardware solution. As of March 31, 1999, computer
and peripherals manufacturers shipping products that incorporate Divicore
technology included: ATI Technologies, Compaq Computer, Dell Computer, ELSA,
Fountain Technologies, Fujitsu Microelectronics, Gateway, Hewlett-Packard,
Micron Electronics, Packard-Bell NEC Europe and Sony Electronics, Inc. In
addition, consumer electronics manufacturers who have incorporated Divicore's
technology include Sanyo Electronics, STMicroelectronics and Yamaha. In 1998,
one customer, Dell Computer, accounted for in excess of 10% of Divicore's
revenues; in 1997, two customers, Hi-Val, Inc. and Pacific Digital Products,
Inc., accounted for in excess of 10% of Divicore's revenues; and in 1996, one
customer, UEP Systems, Inc. accounted for in excess of 10% of Divicore's
revenues.
Research and Development
Divicore believes that its future competitive position will depend in large
part on its ability to develop new and enhanced digital video and audio
solutions and its ability to meet the evolving and rapidly changing needs of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers. Divicore has invested significant time and resources in creating
a structured process for undertaking all product development. This process
involves several functional groups within Divicore and is designed to provide a
framework for defining and addressing the activities required to bring product
concepts and development projects to market. Divicore has assembled a core team
of experienced software architects, software engineers and system hardware
engineers.
50
<PAGE>
As of March 31, 1999, Divicore employed a total of 63 research and
development personnel in three offices. In the years ending December 31, 1998,
1997 and 1996, Divicore's research and development expenditures totaled $3.1
million, $1.8 million and $1.0 million, respectively. To date, Divicore has not
capitalized any research and development expenses.
Intellectual Property and Proprietary Rights
Divicore relies upon a combination of patent, copyright, trade secret and
trademark laws to protect its intellectual property. Divicore currently has
three pending U.S. patent applications related to its digital video and audio
stream management technology. In addition, Divicore has a pending trademark
application for the mark "Divicore" and a second pending trademark application
for the mark "CineMaster" which has been approved for publication by the United
States Patent and Trademark Office. Although Divicore relies on patent,
copyright, trade secret and trademark laws to protect its technology, Divicore
believes that factors such as the technological and creative skill of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance are more essential to establishing and maintaining
technology leadership position. Others may develop technologies that are
similar or superior to Divicore's technology.
Divicore generally enters into confidentiality or license agreements with
its employees and consultants and corporations with whom it has strategic
relationships, and generally controls access to and distribution of its
software, documentation and other proprietary information. In addition,
Divicore often incorporates the intellectual property of its strategic
customers into its designs and has obligations with respect to the use and
disclosure of such intellectual property. Despite Divicore's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use its products or technology or to develop products with the same
functionality as Divicore's products. Policing unauthorized use of its products
is difficult, and Divicore cannot be certain that the steps it has taken will
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect proprietary rights as fully as do the laws of
the United States.
The market for digital video and audio software and hardware solutions is
characterized by vigorous protection and pursuit of intellectual property
rights. From time to time, Divicore has received, and it expects to continue to
receive, notice of claims of infringement of other parties' proprietary rights.
For example, Divicore has recently received notice from two of its customers
who are personal computer manufacturers that a third party with substantial
financial resources has alleged that aspects of MPEG-2 technology infringe upon
patents held by the third party. The third party has invited these customers to
license the technology covered by the patents. These customers have contacted
Divicore for assistance in determining whether its technology falls within the
scope of the asserted patent claims and may in the future seek compensation or
indemnification from us arising out of the third-party claims. In addition, a
consortium of companies known as MPEG-LA has notified a number of personal
computer manufacturers, including our customers, that patents owned by members
of the consortium are infringed by the personal computer manufacturers in their
distribution of MPEG-2 technology. MPEG-LA has requested that these personal
computer manufacturers pay license royalties for use of the technology covered
by MPEG-LA patents. These personal computer manufacturers may in the future
seek compensation or indemnification from Divicore arising out of the MPEG-LA
claims. Also, a third party has asserted that the parental control features of
Divicore's CineMaster products infringe certain patents held by the third
party. Divicore believes these claims to be without merit. These and any other
claims of infringement against Divicore, whether or not such claims have merit,
could result in litigation. Any litigation related to intellectual property,
brought by us or others, could result in the expenditure of significant
financial and managerial resources. In addition, litigation in which Divicore
is accused of infringement may cause product shipment delays, require Divicore
to develop non-infringing technology, or require Divicore to enter into royalty
or license agreements even before the issue of infringement has been decided on
the merits. If any such litigation is not resolved in Divicore's favor, it
could become subject to substantial damage claims and also be enjoined from the
continued use of the technology at issue unless it enters into a royalty or
license agreement. Such royalty or license agreements, if required, might not
be available on acceptable terms, or at all, and could harm Divicore's
business. If a successful claim of patent infringement were made against
51
<PAGE>
Divicore and Divicore could not develop non-infringing technology or license
the infringed or similar technology on a timely and cost-effective basis, its
business could be significantly harmed.
Competition
Divicore competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Divicore competes on the basis of performance,
functionality, feature sets and price in both the software-based and hardware-
based video and audio stream management markets. Divicore's competitors in the
software-based digital solution market include Mediamatics, Inc. (a division of
National Semiconductor), Zoran Corporation and Xing Technology Corporation
(which has agreed to be acquired by RealNetworks, Inc.). Divicore's competitors
in the hardware-based digital solution market include Sigma Designs, Inc. and
several smaller competitors. Divicore also competes with the research and
development departments of other software companies, as well as those of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers who are in the market for specific digital video or audio
software applications. Divicore is aware of numerous other major personal
computer manufacturers, software developers and other companies that are
focusing significant resources on developing and marketing products and
services that will compete with Divicore's CineMaster products. Semiconductor
manufacturers are positioning their products as offering hardware-based digital
video and audio management capabilities and marketing such products as equal or
superior to Divicore's CineMaster products. In the future, operating system
providers with a larger established customer base, such as Microsoft, may enter
the digital video or audio stream management markets by building video or audio
stream management applications into their operating systems. Personal computer
and consumer electronics manufacturers may use such products as their digital
solutions.
Divicore anticipates continued growth and competition in the digital video
industry, the entrance of new competitors into the market, and that the market
for its products will remain intensely competitive. Many of Divicore's current
and potential competitors have significantly more personnel and greater
financial, technical, marketing and other resources than Divicore.
Employees
As of March 31, 1999, Divicore had a total of 106 full-time employees, 63 of
whom were engaged in research and development, 11 in operations, 14 in sales
and marketing, 10 in program management and 8 in administration. Divicore's
future performance depends in significant part upon the continued services of
its key technical, sales and senior management personnel. The loss of the
services of one or more of Divicore's key employees could harm its business.
Divicore's future success also depends on its continuing ability to attract,
train and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, particularly in the Philadelphia
area, where Divicore is headquartered. Divicore may not be able to retain or
attract key personnel in the future. None of Divicore's employees are
represented by a labor union. Divicore has not experienced any work stoppages
and considers its relations with employees to be good.
Facilities
Divicore leases an aggregate of approximately 12,000 square feet in an
office complex located in Malvern, Pennsylvania. Divicore occupies this space
under a lease expiring in September 2003. In addition to its principal office
space in Malvern, Divicore also leases office space in Lancaster, Pennsylvania,
San Jose, California and Karlsruhe, Germany. These leases are for facilities
ranging from 1,200 square feet to 8,600 square feet and have terms ranging from
month-to-month to 10 years. As of March 31, 1999, 65 of Divicore's employees
worked in its Malvern facility, 10 in its Lancaster facility, 14 in its San
Jose facility and 17 in its Karlsruhe facility. Divicore expects that it will
need to obtain additional office space in the next twelve months.
Legal Proceedings
Divicore is not currently party to any legal proceedings.
52
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Divicore as of April 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Francis E.J. Wilde III.. 48 Chief Executive Officer, President and Director
Jason C. Liu............ 29 Chief Financial Officer, Vice President, Finance and Secretary
Michael R. Harris....... 30 Chief Technology Officer
Robert S. Russell....... 41 Vice President, Strategic Engineering Projects
Leonard D. Sharp........ 40 Vice President, Internet Division
Sharon K. Taylor........ 31 Vice President, Product Management
E. Joseph Vitetta, 42 Vice President, Worldwide Sales
Jr. ...................
William H. Wagner....... 40 Vice President, Engineering
Frederick J. Beste 52 Director
III(1).................
Peter X. Blumenwitz..... 31 Director
Walter L. 53 Director
Threadgill(2)..........
Paul A. Vais(1)(2)...... 40 Director
</TABLE>
- ----------
(1) Member of compensation committee
(2) Member of audit committee
Francis E.J. Wilde III. Mr. Wilde joined Divicore in August 1997 as a
director and President. In April 1998, Mr. Wilde was appointed Chief Executive
Officer. Prior to joining Divicore, from March 1995 to August 1997, Mr. Wilde
served as Vice President of Academic Systems Corporation, an instructional
software company. From January 1994 to March 1995, Mr. Wilde served as the
Senior Vice President of Summa Graphics Corporation, a computer-aided design
graphics peripherals company. From January 1993 to December 1993, Mr. Wilde
served as the Chief Executive Officer of Collaborative Technology Corporation,
an electronic meeting software company. Mr. Wilde holds a B.A. in Business
Administration from Seton Hall University.
Jason C. Liu. Mr. Liu joined Divicore in November 1994 as the Director of
Operations. In June 1996, he became Divicore's Chief Financial Officer, Vice
President of Finance and Secretary. Prior to joining Divicore, from July 1992
to August 1994, Mr. Liu was a management consultant with Deloitte & Touche
Management Consulting, an international consulting company. Mr. Liu holds a
B.A. in Finance and Accounting from Washington University and an M.B.A. from
the Wharton School at the University of Pennsylvania.
Michael R. Harris. Mr. Harris is a co-founder of Divicore. From May 1994 to
September 1995, he served as its Vice President of Engineering. In September
1995, he became Vice President of Technology and in September 1998, he became
the Chief Technology Officer. Prior to co-founding Divicore, from January 1993
to May 1994, Mr. Harris served as Chief Executive Officer and founder of
Checkmate Technologies, a multimedia design consulting firm. Mr. Harris holds a
B.S. in Computer and Electrical Engineering from Purdue University.
Robert S. Russell. Mr. Russell joined Divicore in April 1995 as a senior
Software Engineer. In June 1996, Mr. Russell became Director of Engineering and
in November 1997, became Vice President of Engineering. Since March 1999, Mr.
Russell has served as Vice President of Strategic Engineering Projects. Prior
to joining Divicore, from July 1992 to April 1995, Mr. Russell served as the
Vice President of Development for JFK Associates, Inc., an engineering services
company. Mr. Russell holds a B.S. in Computer Engineering from Iowa State
University.
53
<PAGE>
Leonard D. Sharp. Mr. Sharp joined Divicore in January 1998 as Vice
President of Marketing & Sales. In September 1998, Mr. Sharp became Vice
President of Marketing and in March 1999, he became Vice President of
Divicore's Internet Division. Prior to joining Divicore, from August 1996 to
December 1997, Mr. Sharp served as a principal of Sharp Marketing Group, a
marketing and sales consulting company. From November 1995 to August 1996, Mr.
Sharp served as Director of Marketing & Sales for the Paradise Multimedia
Products Division of Philips Electronics, N.A., a consumer electronics company.
From February 1993 to October 1995, Mr. Sharp served as the Vice President of
Marketing for the Imaging Products division of Western Digital Corporation, an
information storage products company.
Sharon K. Taylor. Ms. Taylor joined Divicore in August 1998 as Product Line
Director for Consumer Electronics. In February 1999, Ms. Taylor became Vice
President of Product Management. Prior to joining Divicore, from September 1994
to July 1998, Ms. Taylor served at Toshiba America Consumer Products, Inc.,
first as Product Marketing Manager and later as Director of Product Marketing.
From November 1993 to August 1994, Ms. Taylor served as Director of New Product
Development at CIDCO, Inc., a telephone and telephony device company. From
August 1990 to October 1993, Ms Taylor served as Production Manager and Quality
Development Manager at AT&T Consumer Products. Ms. Taylor holds an A.A. in
Computer Science from American University of Paris, a B.A. in Linguistics from
the University of California at Davis and an M.B.A. from Columbia University.
E. Joseph Vitetta, Jr. Mr. Vitetta joined Divicore in July 1998 as a
Strategic Account Manager. He became Vice President of Worldwide Sales in
December 1998. Prior to joining Divicore, from September 1996 to July 1998, Mr.
Vitetta served as Director of Partnerships for Academic Systems Corporation, an
instructional software company. From January 1995 to September 1996, Mr.
Vitetta served as the Vice President of National Sales for C-Phone Corporation,
a video communications company. From April 1994 to January 1995, Mr. Vitetta
served as the Director of National Sales for Zig Ziglar Corporation, a
motivational training company. From February 1993 to April 1994, Mr. Vitetta
served as the Vice President of Sales and Marketing for Collaborative
Technology Corporation, an electronic meeting software company. Mr. Vitetta
holds a B.S. in Industrial Design Graphics from Arizona State University.
William H. Wagner. Mr. Wagner joined Divicore in September 1998 as the
Director of Product Development. He became the Vice President of Engineering in
March 1999. Prior to joining Divicore, from June 1997 to August 1998, Mr.
Wagner served as President of Eggplant Systems Corporation, a software
consulting company for which he still serves as a director. From July 1992 to
May 1997, Mr. Wagner served as Director of Software Engineering at Cirrus
Logic, Inc., a precision linear circuit supplier. Mr. Wagner holds a B.S. in
Electrical Engineering from Pennsylvania State University.
Frederick J. Beste III. Mr. Beste has served as a director of Divicore since
April 1999, and he previously served as a director of Divicore from May 1995 to
April 1998. Mr. Beste has served as the President of the general partner of the
NEPA/Mid-Atlantic family of venture capital partnerships since May 1985. From
November 1981 to September 1984, Mr. Beste served as the chief executive
officer of Kentucky Highlands Investment Corp. He also serves on a number of
boards of directors, including: Allegheny Child Care Academy, Inc., Blue Rock
Management Corporation, Delex Systems, Inc., Medtrex, Inc., Outdoor Venture
Corporation, Form Design Corporation, Casecraft Corporation, NEPA II Management
Corporation, MAVF III Management Corporation, Storeroom Solutions, Inc. and the
NET Ben Franklin Technology Center. Mr. Beste holds a B.A. in Economics from
Stetson University.
Peter X. Blumenwitz. Mr. Blumenwitz has served as a Director of Divicore
since April 1999. Since August 1997, Mr. Blumenwitz has served as Assistant
Director of Apax Partners & Co. Beteilgungsberatung A.G., a European private
equity firm. From June 1993 to August 1997, Mr. Blumenwitz served as an
Investment Manager for Technologieholding VC GmbH, a German venture capital
firm and KBG, a quasi- governmental investment firm. Prior to June 1993, he
served as a credit analyst for Allgemeine Kredit, a credit insurer based in
Germany. Mr. Blumenwitz also serves on the boards of directors of ENBA p.l.c.,
Dublin, Ireland and iMediation S.A., Paris, France. Mr. Blumenwitz holds a B.S.
in business administration from the Fachhochschule Munich.
54
<PAGE>
Walter L. Threadgill. Mr. Threadgill has served as a director of Divicore
since January 1998. Since February 1996, Mr. Threadgill has served as General
Managing Partner of Atlantic Coastal Ventures, L.P., a venture capital firm.
Since June 1979, Mr. Threadgill has also served as President and Chief
Executive Officer of Multimedia Broadcast Investment Corporation (or MBIC), a
venture capital company specializing in broadcast financing. Prior to forming
MBIC, Mr. Threadgill was Divisional Vice President of Fiduciary Trust Company
in New York and Senior Vice President, Chief Operating Officer of United
National Bank in Washington, D.C. He also serves on several boards of directors
including: ICG Communications, Inc., Citywide Broadcasting, Inc. and Unisource
Network Services, Inc. Mr. Threadgill holds a B.A. in Business Administration
from Bernard M. Baruch College, City University of New York, an M.B.A. from
Long Island University and an M.A. in International and Telecommunications Law
from Antioch School of Law.
Paul A. Vais. Mr. Vais has served as a director of Divicore since April
1998. Mr. Vais has been a Managing Director of Patricof & Co. Ventures, Inc., a
venture capital firm, since March 1997. From March 1995 to December 1996, Mr.
Vais served as Vice President of Enterprise Partners V.C., a venture capital
firm. From October 1994 to March 1995, Mr. Vais served as a consultant for
International Business Machines and several early stage companies, providing
expertise in strategic marketing and technology development. Mr. Vais also
worked at NeXT Computer, Inc., from July 1988 to October 1994, where he served
as the Executive Director of Worldwide Marketing, and with Apollo Computer, an
engineering workstation company. Mr. Vais serves as a director of Icarian,
Inc., Oblix, Inc. and InfoLibria, Inc. Mr. Vais holds an A.B. in Computer
Science from the University of California at Berkeley.
Board of Directors and Committees
Divicore currently has authorized five directors. Following this offering,
the board will consist of five directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Mr. Beste is a Class I director
whose term will expire in 2000, Messrs. Blumenwitz and Wilde are Class II
directors whose terms will expire in 2001 and Messrs. Vais and Threadgill are
Class III directors whose terms will expire in 2002. The officers serve at the
discretion of the board. There are no familial relationships between any of
Divicore's officers and directors.
Divicore has established an audit committee composed of independent
directors, which reviews and supervises Divicore's financial controls,
including the selection of its auditors, reviews the books and accounts, meets
with its officers regarding its financial controls, acts upon recommendations
of auditors and takes further actions as the audit committee deems necessary to
complete an audit of Divicore's books and accounts, as well as other matters
which may come before it or as directed by the board. The audit committee
currently consists of two directors, Messrs. Vais and Threadgill.
Divicore has established a compensation committee, which reviews and
approves the compensation and benefits for Divicore's executive officers,
administers its stock plans and performs other duties as may from time to time
be determined by the board. The compensation committee currently consists of
two directors, Messrs. Beste and Vais. None of Divicore's executive officers
serve on the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the board or
compensation committee.
Director Compensation
Divicore currently does not compensate any non-employee member of the board.
Directors who are also employees of Divicore do not receive additional
compensation for serving as directors. Non-employee directors will be eligible
to receive discretionary option grants and stock issuances under the 1999 Stock
Incentive Plan. Individuals who are serving as non-employee board members on
the date of execution of the underwriting agreement for this offering will
receive automatic option grants on such date. In addition, under the 1999 Stock
Incentive Plan, non-employee directors will receive automatic option grants
upon becoming directors and on the date of each annual meeting of stockholders.
See "Management--Benefit Plans."
55
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
during the year ended December 31, 1998 of each person who served as Divicore's
Chief Executive Officer and each of the four other most highly compensated
executive officers who earned more than $100,000 for the fiscal year ended
December 31, 1998, referred to in this prospectus as the Named Executive
Officers. No individual who would otherwise have been includable in such table
on the basis of salary and bonus earned during 1998 has resigned or otherwise
terminated his employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or ten percent (10%) of the total annual
salary and bonus of each of the Named Executive Officers in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Fiscal Annual Compensation Securities
Name and Principal Year -------------------- Underlying All Other
Position Ended Salary ($) Bonus ($) Options(1) Compensation
------------------ ------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Francis E.J. Wilde
III................... 1998 $123,000 $98,625 173,729 --
Chief Executive
Officer, President
and Director
Jason C. Liu........... 1998 112,875 27,125 59,281 --
Chief Financial
Officer, Vice
President,
Finance and Secretary
Michael R. Harris...... 1998 116,250 22,500 56,875 --
Chief Technology
Officer
Robert S. Russell...... 1998 112,875 25,125 49,490 --
Vice President,
Strategic Engineering
Projects
Leonard D. Sharp....... 1998 123,750 33,125 176,667(2) --
Vice President,
Internet Division
Gregg W. Garnick(3).... 1998 64,437 -- 5,927 $125,000
Former Chief Executive
Officer
</TABLE>
- ----------
(1) Includes options granted in 1998 at a new exercise price in cancellation of
pre-existing options originally granted from 1996 to 1998 but with a higher
exercise price as follows:
<TABLE>
<S> <C>
Francis E.J. Wilde III......................................... 169,563
Jason C. Liu................................................... 53,656
Michael R. Harris.............................................. 52,708
Robert S. Russell.............................................. 44,802
Leonard D. Sharp............................................... 84,375
Gregg W. Garnick............................................... 2,802
-------
407,906
=======
</TABLE>
(2) Includes 84,375 shares granted to Mr. Sharp in the last fiscal year, which
were regranted in 1998 at a new exercise price.
(3) Mr. Garnick resigned as Chief Executive Officer in April 1998 and as a
director in April 1999. Mr. Garnick received a severance payment of
$125,000, equal to one year's salary, in June 1998.
56
<PAGE>
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in 1998, including the
potential realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent Divicore's estimate of future stock
price. Actual gains, if any, on stock option exercises will be dependent on the
future performance of Divicore's common stock. No stock appreciation rights
were granted during 1998.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term ($)
------------------------------------------------------ -----------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998 (%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Francis E.J. Wilde III.. 1,042 0.06% $6.00 02/27/03 $ 3,931 $ 9,961
1,042 0.06 4.98 04/14/03 3,262 8,268
166,667(1) 9.30 2.52 09/23/03 264,136 669,372
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
813(1) 0.05 2.52 09/23/03 1,288 3,263
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
Option Grants in 1998
Jason C. Liu............ 1,563 0.09% $6.00 02/27/03 $ 5,896 $ 14,941
1,563 0.09 4.98 04/14/03 4,894 12,401
417 0.02 2.52 09/23/03 660 1,673
1,563(1) 0.09 2.52 09/23/03 2,476 6,275
531(1) 0.03 2.52 09/23/03 842 2,133
1,563(1) 0.09 2.52 09/23/03 2,476 6,275
50,000(1) 2.79 2.52 09/23/03 79,241 200,812
1,042 0.06 2.52 10/21/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
Michael R. Harris....... 1,042 0.06% $6.00 02/27/03 $ 3,931 $ 9,961
1,042 0.06 4.98 04/14/03 3,262 8,268
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
626(1) 0.03 2.52 09/23/03 991 2,510
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
50,000(1) 2.79 2.52 09/23/03 79,241 200,812
1,042 0.06 2.52 10/21/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
Robert S. Russell....... 1,042 0.06% $6.00 02/27/03 $ 3,931 $ 9,961
1,563 0.09 4.98 04/14/03 4,894 12,401
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
531(1) 0.03 2.52 09/23/03 842 2,133
1,563(1) 0.09 2.52 09/23/03 2,476 6,275
41,667(1) 2.32 2.52 09/23/03 66,034 167,343
1,042 0.06 2.52 10/21/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term ($)
----------------------------------------------------- -----------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998(%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leonard D. Sharp........ 83,333 4.65% $ 6.00 02/27/03 $314,447 $796,871
5,833 0.33 1.50 02/27/03 22,011 55,781
1,042 0.06 4.98 04/14/03 3,262 8,268
58,333(1) 3.25 2.52 09/23/03 92,448 234,280
25,000(1) 1.39 2.52 09/23/03 39,620 100,406
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
Gregg W. Garnick........ 1,042 0.06% $ 6.00 02/27/03 $ 3,931 $ 9,961
1,042 0.06 4.98 04/14/03 3,262 8,268
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
719(1) 0.04 2.52 09/23/03 1,139 2,886
1,042(1) 0.06 2.52 09/23/03 1,651 4,184
1,042 0.06 2.52 10/21/03 1,651 4,184
</TABLE>
- ----------
(1) The option was originally granted with an exercise price in excess of $2.52
per share and was cancelled on September 23, 1998 in exchange for a new
option for the number of shares subject to the option at the time of the
regrant with an exercise price of $2.52 per share, the fair market value
per share of Common Stock on the date of regrant.
In 1998, Divicore granted options to purchase up to an aggregate of
1,792,897 shares to employees, directors and consultants, of which 572,170
grants were attributable to deemed regrants of options granted prior to
September 23, 1998 as the result of their repricing on such date to an exercise
price of $2.52 per share. Options to purchase 783,333 shares were granted
outside of Divicore's 1995 Stock Option Plan and options to purchase 1,009,563
shares were granted under Divicore's 1995 Stock Option Plan at exercise prices
at the fair market value of Divicore's common stock on the date of grant, as
determined in good faith by the Board of Directors. The exercise price may be
paid in cash, with shares of common stock or through a cashless exercise price.
All options became exercisable over a four-year period, with 25% of the shares
vesting on the one year anniversary of the grant date and the remainder vesting
in 36 equal monthly installments. To the extent not already exercisable, all of
these options will become exercisable in the event of an acquisition of
Divicore. All options have a term of five years, subject to earlier termination
in certain situations related to termination of employment. Notwithstanding the
foregoing, Mr. Wilde was granted options to purchase 166,667 shares in 1998
which vested upon the achievement of specific performance milestones at the
time of grant. In addition, options granted to Mr. Sharp to purchase 5,833
shares were subject to certain performance goals for vesting purposes, which
were met and these options have fully vested.
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Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning the number and value
of shares of common stock underlying the options held by the Named Executive
Officers. No options or stock appreciation rights were exercised during 1998
and no stock appreciation rights were outstanding as of December 31, 1998. The
value of unexercised in-the-money options at December 31, 1998 is calculated on
the basis of the fair market value of Divicore's common stock on December 31,
1998, as determined by the Board, less the aggregate exercise price of such
options.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Francis E.J. Wilde III.. 166,921 5,767 $ 0 $ 0
Jason C. Liu............ 90,691 7,032 24,121 0
Michael R. Harris....... 543,453 5,638 362,773 0
Robert S. Russell....... 46,852 6,095 9,649 0
Leonard D. Sharp........ 5,833 86,458 0 0
Gregg W. Garnick........ 40,105 3,544 73,376 0
</TABLE>
Benefit Plans
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to Divicore's 1995 Stock Option Plan. Divicore's 1999 Stock
Incentive Plan was adopted by the board in April 1999 and is expected to be
approved by the stockholders in May 1999. The 1999 Stock Incentive Plan became
effective upon its adoption by the board. All outstanding options under
Divicore's existing 1995 Stock Option Plan will be transferred to the 1999
Stock Incentive Plan on the date of this offering, and no further option grants
will be made under the 1995 Stock Option Plan. The transferred options will
continue to be governed by their existing terms, unless Divicore's compensation
committee decides to extend one or more features of the 1999 Stock Incentive
Plan to those options. Except as otherwise noted below, the transferred options
have substantially the same term as will be in effect for grants made under the
discretionary option grant program of Divicore's 1999 Stock Incentive Plan.
Share Reserve. shares of Divicore's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. This share reserve
consists of the number of shares Divicore estimates will be carried over from
the 1995 Stock Option Plan plus an additional increase of
shares. The share reserve under Divicore's 1999 Stock Incentive Plan will
automatically increase on the first trading day in January each year, beginning
January 1, 2000, by an amount equal to one percent of the total number of
shares of common stock outstanding on the last trading day of the prior month,
but in no event will this annual increase exceed shares. In addition,
no participant in Divicore's 1999 Stock Incentive Plan may be granted stock
options or direct stock issuances for more than shares of common
stock in total in any calendar year.
Programs. Divicore's 1999 Stock Incentive Plan has three separate programs:
. the discretionary option grant program, under which eligible individuals
in Divicore's employ may be granted options to purchase shares of
Divicore's common stock at an exercise price determined by the plan
administrator;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services; and
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. the automatic option grant program, under which option grants will be
made at periodic intervals to eligible non-employee board members to
purchase shares of common stock at an exercise price equal to the fair
market value of those shares on the grant date.
The individuals eligible to participate in Divicore's plan include its
officers and other employees, its board members and any consultants it hires.
Administration. The discretionary option grant and stock issuance programs
will be administered by Divicore's compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding.
Plan Features. Divicore's 1999 Stock Incentive Plan will include the
following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of Divicore's common stock valued at fair market value
on the exercise date. The option may also be exercised through a same-
day sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from Divicore's 1995 Stock Option Plan, in return
for the grant of new options for the same or different number of option
shares with an exercise price per share based upon the fair market value
of Divicore's common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from Divicore equal
to the fair market value of the shares subject to the surrendered
options less the exercise price payable for those shares. We may make
the payment in cash or in shares of Divicore's common stock. None of the
options under Divicore's 1995 Stock Option Plan have any stock
appreciation rights.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program, and these
rights may also be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with
this feature may be surrendered to Divicore upon the successful
completion of a hostile tender offer for more than 50% of Divicore's
outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount
per surrendered option share based upon the highest price per share of
Divicore's common stock paid in that tender offer.
Change in Control. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. In the event that Divicore is acquired by merger or asset sale or a
board-approved sale of more than fifty percent of Divicore's stock by
its stockholders, each outstanding option under the discretionary option
grant program which is not to be assumed or continued by the successor
corporation will immediately become exercisable for all the option
shares, and all outstanding unvested shares will immediately vest,
except to the extent Divicore's repurchase rights with respect to those
shares are to be assigned to the successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with Divicore or the acquiring entity is subsequently
terminated. The
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<PAGE>
vesting of any outstanding shares under Divicore's 1999 Stock Incentive
Plan may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of Divicore's outstanding voting stock or a
change in the majority of Divicore's board through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
. The options currently outstanding under Divicore's 1995 Stock Option
Plan will immediately vest upon an acquisition of Divicore by merger or
asset sale or sale of more than fifty percent of Divicore's outstanding
stock by its stockholders. There are no other change in control
provisions currently in effect for those options. However, the
compensation committee may extend the acceleration provisions of
Divicore's 1999 Stock Incentive Plan to any or all of those options.
Automatic Option Grant Program. Each individual who is serving as a non-
employee board member on the date the underwriting agreement for this offering
is executed will automatically receive on such date an option to purchase
20,000 shares of Divicore's common stock, provided he has not been in the prior
employ of Divicore. Each individual who first becomes a non-employee board
member at any time after this offering will automatically receive on the date
of his or her appointment, an option to purchase 20,000 shares of Divicore's
common stock. On the date of each annual stockholders meeting following this
offering, each individual who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 5,000 shares of
Divicore's common stock, provided he or she has served on the board for at
least six months.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The option
will be immediately exercisable for all of the option shares; however, any
unvested shares purchased under the option will be subject to repurchase by
Divicore, at the exercise price paid per share, should the optionee cease board
service prior to vesting in those shares. The shares subject to each 20,000
share initial automatic option grant will vest over a four year period in
successive equal annual installments upon the individual's completion of each
year of board service over the four year period measured from the option grant
date. Each 5,000 share subsequent automatic option grant will vest upon the
individual's completion of one year of board service measured from the option
grant date. However, the shares subject to each automatic grant will
immediately vest in full upon certain changes in control or ownership of
Divicore or upon the optionee's death or disability while a board member.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan
will terminate no later than April 29, 2009.
1999 Employee Stock Purchase Plan
Introduction. Divicore's 1999 Employee Stock Purchase Plan was adopted by
the board in April 1999 and is expected to be approved by the stockholders in
May 1999. The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow
eligible employees of Divicore and its participating subsidiaries to purchase
shares of common stock, at semi-annual intervals, with their accumulated
payroll deductions.
Share Reserve. 500,000 shares of common stock will initially be reserved for
issuance.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering covered by
this prospectus is signed and will end on the last business day in July 2001.
The next offering period will start on the first business day in August 2001,
and subsequent offering periods will be set by Divicore's compensation
committee. Shares will generally be purchased on the last business day of
January and July during each offering period.
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<PAGE>
Reset Feature. If the fair market value per share of Divicore's common stock
on any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of February and August each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of January and July
each year. In no event, however, may any participant purchase more than 1,300
shares on any purchase date, and not more than 125,000 shares may be purchased
in total by all participants on any purchase date.
Change in Control. Should Divicore be acquired by merger or sale of
substantially all of Divicore's assets or more than fifty percent of its voting
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition
occurs or, if lower, 85% of the fair market value per share immediately prior
to the acquisition.
The plan will terminate no later than the last business day of July 2009.
The board may at any time amend, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
In August 1997, Divicore entered into an employment letter agreement with
Mr. Wilde. The annual base salary for Mr. Wilde is $125,000 per annum. Under
the employment letter agreement, Divicore paid $25,000 to Mr. Wilde as a
signing bonus and granted to Mr. Wilde a stock option to purchase 166,667
shares of Divicore common stock at an exercise price of $6.00 per share. These
stock options have fully vested. These stock options were regranted on
September 23, 1998 at $2.52 per share. In addition, in the event of a sale of
all of the assets or a merger in which Divicore is not the surviving entity and
in which Divicore is valued at $80,000,000 or more, Mr. Wilde is entitled to
the greater of 2.5% of the proceeds or $2,000,000 in cash.
In November 1997, Divicore entered into an employment agreement with Mr.
Harris, in which Divicore hired Mr. Harris as its Chief Technology Officer for
a two year term at a base salary of $125,000 per year, an annual cash bonus of
$35,000 and incentive stock options to purchase up to 4,167 shares of common
stock in minimum blocks of 2,083 shares at an exercise price of $1.50 per
share. In addition, if Mr. Harris is terminated for any reason other than gross
malfeasance or gross nonfeasance, he will be paid his then-current salary for
six additional months. Finally, if Mr. Harris is terminated, his options
immediately vest.
In November 1997, Divicore entered into an employment agreement with Mr.
Liu, in which Divicore hired Mr. Liu as its Chief Financial Officer for a term
of two years at a base salary of $125,000 per year plus an annual cash bonus of
$35,000 and options to purchase up to 4,167 shares of common stock per year for
significant performance and an additional 2,083 shares of common stock for
exceptional performance. In addition, if Mr. Liu is terminated for any reason
other than gross malfeasance or gross nonfeasance, he will be paid his then-
current salary for six additional months.
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In December 1997, Divicore entered into an employment agreement with Mr.
Sharp, in which Divicore hired Mr. Sharp as Vice President of Sales and
Marketing for a two year term at a base salary of $125,000 per year, an annual
cash bonus of $35,000, a commission in 1998 of three percent of the gross
contribution margin in excess of $9,236,000 and options to purchase up to
83,333 shares of common stock at an exercise price of $6.00 per share that
immediately vest upon a change of control or the resignation, termination or
demotion of Frank Wilde. In addition, Mr. Sharp may be awarded additional
options to purchase up to 4,167 shares of common stock per year for significant
performance and options to purchase up to an additional 2,083 shares of common
stock for exceptional performance. Finally, if Mr. Sharp is terminated for any
reason other than gross malfeasance or gross nonfeasance, he will be paid his
then-current salary for six additional months.
In December 1997, Divicore entered into an employment agreement with Mr.
Russell, in which Divicore hired Mr. Russell as the Director of Engineering for
a two year term for a base salary of $125,000 per year, an annual cash bonus of
$35,000 per year and options to purchase up to 4,167 shares of common stock per
year for significant performance and an additional 2,083 shares of common stock
per year for exceptional performance. In addition, if Mr. Russell is terminated
for any reason other than gross malfeasance or gross nonfeasance, he will be
paid his then-current salary for six additional months.
In February 1998, Divicore entered into an employment agreement with Mr.
Garnick, in which Divicore employed Mr. Garnick as Chairman of the Board and
Chief Executive Officer for an initial two year term commencing January 1, 1998
at a base salary of $125,000. In March 1998, this employment agreement was
amended, as a result of which Mr. Garnick resigned as Chief Executive Officer
but remained employed by Divicore and remained as a director. The amendment
provided that if Mr. Garnick was terminated by Divicore (other than for gross
malfeasance or gross non-feasance) or if he resigned his employment at Divicore
or if he were removed as Chairman of the Board, he would nonetheless remain a
director of Divicore until either a merger or an initial public offering of
Divicore stock.
In April 1999, Divicore entered into a letter agreement with Gregg W.
Garnick, pursuant to which Mr. Garnick resigned as a director of Divicore and
agreed to enter into a consulting agreement to perform marketing and other
special projects for a term expiring on the earlier of one year or seven months
from the closing of this offering. In addition, Divicore accelerated 2,635 of
Mr. Garnick's unvested options.
Limitation of Liability and Indemnification
Divicore's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, subject to certain exceptions,
directors' personal liability to Divicore or its stockholders for monetary
damages for breaches of fiduciary duties. The certificate of incorporation does
not, however, eliminate or limit the personal liability of a director for the
following:
. any breach of the director's duty of loyalty to Divicore or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Divicore's bylaws provide that Divicore shall indemnify its directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law. In addition,
Divicore has entered into an indemnification agreement with each of its
directors and officers. The indemnification agreements contain provisions that
require Divicore, among other things, to indemnify its directors and executive
officers against certain liabilities (other than liabilities arising from
intentional or knowing and culpable violations of law) that may arise by reason
of their status or service as directors or executive officers of Divicore or
other entities to
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which they provide service at the request of Divicore and to advance expenses
they may incur as a result of any proceeding against them as to which they
could be indemnified. Divicore believes that these bylaw provisions and
indemnification agreements are necessary to attract and retain qualified
directors and officers. Prior to the consummation of the offering, Divicore
will obtain an insurance policy covering directors and officers for claims they
may otherwise be required to pay or for which Divicore is required to indemnify
them, subject to certain exclusions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Divicore where indemnification will be
required or permitted, and Divicore is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
Sales of Securities
Since January 1996, Divicore has raised capital primarily through the sale
of its securities, including:
. In March 1996, Divicore sold a combination of subordinated notes and
warrants to purchase an aggregate of 83,635 shares of Class A
Preferred Stock at an exercise price of $0.746352 per share to NEPA
Venture Fund II, L.P. for an aggregate consideration of $125,000.
. In March 1998, Divicore entered into a Development and License
Agreement with ATI Technologies, Inc. whereby Divicore agreed to
allow ATI Technologies to convert up to $125,000 in prospective
royalty payments due to Divicore per quarter in each of the first
four quarters of royalty payments and $500,000 in the fourth quarter
of the second year of royalty payments into 200,803 shares of Class
B Preferred Stock and warrants to purchase 81,727 shares of common
stock at an exercise price of $0.06 per share.
. In December 1997 and March 1998, Divicore borrowed $1,770,000 from
Atlantic Coastal Ventures L.P. pursuant to 6% convertible
subordinated debentures due March and May 1998. In April 1998,
Atlantic Coastal Ventures received interest on the debentures in the
form of common stock and exercised warrants received with the
debentures for 208,682 shares of common stock. In addition, Atlantic
Coastal Ventures converted the debentures into 355,422 shares of
Class B Preferred Stock.
. In April 1998, Divicore sold to various investors including entities
affiliated with Patricof & Co. Ventures, Inc. and Atlantic Coastal
Ventures an aggregate of 3,226,908 shares of Class B Preferred Stock
and warrants to purchase 1,313,351 shares of its common stock at an
exercise price of $.06 per share for an aggregate consideration of
$16,070,000.
. In May 1998, Divicore sold to ATI Technologies an aggregate of
502,008 shares of Class B Preferred Stock and warrants to purchase
204,317 shares of common stock at $0.06 per share for an aggregate
consideration of $2,500,000.
The following table summarizes the shares of common stock, preferred stock
and warrants purchased by Divicore's executive officers, directors and 5%
percent stockholders and persons associated with them since January 1996. The
number of total shares on an as-converted basis reflects a one-to-one
conversion to common stock ratio for each share of Class A and Class B
Preferred Stock.
<TABLE>
<CAPTION>
Total
Warrants to shares on
Class A Class B Purchase an As-
Common Preferred Preferred Common Converted
Investor Stock Stock Stock Stock Basis
- -------- ------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NEPA Venture Fund II, L.P. .. 0 83,635 0 0 83,635
Entities affiliated with
Patricof & Co.
Ventures.................... 0 0 2,108,434 858,133 2,966,566
Atlantic Coastal Ventures
L.P. ....................... 208,682 0 355,422 0 564,104
ATI Technologies, Inc. ...... 0 0 577,309 234,965 812,274
------- ------ --------- --------- ---------
208,682 83,635 3,041,165 1,093,087 4,426,578
======= ====== ========= ========= =========
</TABLE>
Agreements with Officers and Directors
Messrs. Vais and Threadgill are on the board of directors pursuant to
agreements with Divicore.
In March 1996, Divicore entered into a series of salary deferral
transactions with each of Gregg W. Garnick, Jason C. Liu and Robert S. Russell,
whereby in exchange for salary deferral, each officer received non-plan stock
options to purchase 50,510 shares of common stock at an exercise price of $0.60
per share.
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In April 1998, Divicore repurchased 200,000 shares of Divicore common stock
from Gregg W. Garnick, at a price of $3.60 per share for an aggregate
consideration of $720,000.
In September 1998, Divicore entered into an agreement with Michael Harris
and Brenda Harris in which the Harrises borrowed $60,000 payable in three years
with no interest accruing in those three years. In addition, if Mr. Harris
achieves each of his quarterly performance goals with Divicore, at the end of
each year, Divicore will forgive one-third of the principal amount. If Mr.
Harris voluntarily leaves or is terminated for cause, the note is immediately
due and payable. However, if Divicore completes an initial public offering of
its stock, Divicore will completely forgive the note. The parties also entered
into an agreement confirming that the note is immediately payable upon
termination and that the outstanding principal will be forgiven upon an initial
public offering of Divicore common stock.
Agreement with ATI Technologies Inc.
In March 1998, Divicore entered into a Development and License Agreement
with ATI Technologies for a term of two years, and extendable for one year
terms thereafter, pursuant to which Divicore granted a worldwide, non-exclusive
license to ATI Technologies to Divicore's Software DVD, Video Encoder Software,
and Hardware DVD technology in exchange for a royalty for each copy of Video
Encoder Software sold by ATI Technologies. ATI Technologies agreed to pay to
Divicore a minimum quarterly royalty payment; however, ATI Technologies is
allowed to convert up to $125,000 of prospective quarterly royalty payments in
each of the first four quarters of royalty payments and $500,000 of prospective
quarterly royalty payments in the fourth quarter of the second year of royalty
payments into shares of Class B Preferred Stock and warrants to purchase common
stock. This agreement may be terminated by either party for a material breach
of the agreement or for a repeated breach of the agreement subject to certain
notice requirements. In April 1999, Divicore issued 25,100 shares of Class B
Preferred Stock and warrants to purchase 10,216 shares of common stock under
this agreement. Also in April 1999, Divicore amended the agreement to terminate
ATI Technology's right to receive Class B Preferred Stock and warrants and
issued to ATI Technologies 100,402 shares of Class B Preferred Stock and
warrants to purchase 40,863 shares of common stock in exchange for which
Divicore received promissory notes with an aggregate value of $500,000.
Other Related Party Transactions
Divicore has entered into employment agreements with its executive officers.
See "Management--Employment Contracts, Termination of Employment and Change in
Control Arrangements."
Holders of shares of preferred stock are entitled to certain registration
rights in respect of the common stock issued or issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights."
Divicore has also granted additional options and issued common stock to
certain of its executive officers and directors. See "Management--Director
Compensation," and "Principal Stockholders."
Divicore has entered into an Indemnification Agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature) and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. See "Management--Limitation on
Liability and Indemnification Matters."
Divicore has entered into non-competition and confidentiality agreements
with certain of its officers.
Divicore believes that all of the transactions set forth above were made on
terms no less favorable to Divicore than could have been otherwise obtained
from unaffiliated third parties. All future transactions, including loans, if
any, between Divicore and its officers, directors and principal stockholders
and their
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affiliates and any transactions between Divicore and any entity with which its
officers, directors or 5% stockholders are affiliated will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to Divicore than could be obtained from unaffiliated third
parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
Divicore's common stock as of April 30, 1999, by the following individuals or
groups:
. Each person or entity who is known by Divicore to own beneficially
more than 5% of Divicore's outstanding stock
. Each of the Named Executive Officers
. Each director of Divicore
. All directors and executive officers as a group
Applicable percentage ownership in the following table is based on
11,232,039 shares of common stock outstanding as of April 30, 1999, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering and treating as outstanding all shares of common stock
issuable upon exercise of warrants to purchase common stock and preferred stock
and options exercisable within 60 days of April 30, 1999 held by the particular
stockholder and that are included in the first column. The numbers shown in the
table below assume no exercise by the underwriters of their over-allotment
option.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Divicore Inc., One Great Valley Parkway, Malvern,
Pennsylvania 19355. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Name and Address of Number of Shares ------------------------------------
Beneficial Owner Beneficially Owned Prior to Offering After the Offering
- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
NEPA Venture Fund II,
L.P.(1)................ 920,006 8.2%
Entities affiliated with
Patricof & Co.
Ventures, Inc.(2)...... 2,966,566 26.4%
Atlantic Coastal
Ventures L.P.(3)....... 564,104 5.0%
ATI Technologies,
Inc.(4)................ 812,274 7.2%
Frank E.J. Wilde
III(5)................. 167,651 1.5%
Jason C. Liu(6)......... 165,138 1.5%
Michael R. Harris(7).... 515,695 4.6%
Robert S. Russell(8).... 47,700 *
Leonard D. Sharp(9)..... 32,179 *
Frederick J. Beste
III(1)................. 920,006 8.2%
Peter X. Blumenwitz(2).. 2,966,566 26.4%
Walter L.
Threadgill(3).......... 564,104 5.0%
Paul A. Vais(2)......... 2,966,566 26.4%
Gregg W. Garnick(10).... 1,046,618 9.3%
All directors and
executive officers as a
group
(twelve persons)(11)... 5,395,705 48.0%
</TABLE>
- ----------
*Less than 1%.
(1) Principal Address is 125 Goodman Drive, Bethlehem, PA 18015. Includes
warrants to purchase 836,371 shares of Class A Preferred Stock at an
exercise price of $0.5978262 per share and warrants to purchase 83,635
shares of Class A Preferred Stock at an exercise price of $0.746352 per
share.
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<PAGE>
Mr. Beste is the President of the general partner of NEPA Venture Fund II,
L.P. and a director of Divicore. Mr. Beste disclaims beneficial ownership
of all Divicore shares except to the extent of his pecuniary interest in
NEPA Venture Fund II, L.P.
(2) Principal Address is 445 Park Avenue, New York, NY 10022. Represents
133,374 shares of common stock and warrants to purchase 54,283 shares of
common stock at an exercise price of $0.06 per share held by Coutts & Co.
(Cayman) Ltd., 602,410 shares of common stock and warrants to purchase
245,181 shares of common stock at an exercise price of $0.01 per share
held by The P/A Fund III, L.P., 602,410 shares of common stock and
warrants to purchase 245,181 shares of common stock at an exercise price
of $0.06 per share held by Apax Germany II L.P., 14,458 shares of common
stock and warrants to purchase 5,884 shares of common stock at an exercise
price of $0.06 per share held by Patricof Private Investment Club, L.P.,
and 755,783 shares of common stock and warrants to purchase 307,604 shares
of common stock at an exercise price of $0.06 per share held by APA
Excelsior IV, L.P. Mr. Vais is a Vice President of Patricof Co. Ventures,
Inc. and a director of Divicore. Mr. Vais disclaims beneficial ownership
of all Divicore shares, except to the extent of his pecuniary interest in
Patricof Private Investment Club, L.P. Mr. Blumenwitz is an Assistant
Director of Apax Partners & Co. Beteilgingsberatung A.G. and a director of
Divicore. Mr. Blumenwitz disclaims beneficial ownership of all Divicore
shares, except to the extent of his pecuniary interest in Apax Germany II
L.P.
(3) Principal Address is 3101 South Street N.W., Washington, D.C. 20007.
Includes 564,104 shares of common stock held by Atlantic Coastal Ventures,
L.P. Mr. Threadgill is a General Partner of Atlantic Coastal Ventures,
L.P. and a director of Divicore. Mr. Threadgill disclaims beneficial
ownership of all Divicore shares, except to the extent of his pecuniary
interest in Atlantic Coastal Ventures, L.P.
(4) Principal address is 33 Commerce Valley Drive East, Thornhill, Ontario
Canada L3T7N6. Includes 577,309 shares of common stock and warrants to
purchase 234,965 shares of common stock at an exercise price of $0.06 per
share. Mr. Hartog is a Vice President of Engineering for ATI Technologies,
Inc. Mr. Hartog disclaims beneficial ownership of all Divicore shares.
(5) Includes 167,651 shares of common stock issuable upon exercise of
immediately exercisable options.
(6) Includes 91,701 shares of common stock issuable upon exercise of
immediately exercisable options.
(7) Includes 341,160 shares of common stock issuable upon exercise of
immediately exercisable options.
(8) Includes 47,700 shares of common stock issuable upon exercise of
immediately exercisable options.
(9) Includes 32,179 shares of common stock issuable upon exercise of
immediately exercisable options.
(10) Includes 43,649 shares of common stock issuable upon exercise of
immediately exercisable options.
(11) Includes 700,058 shares of common stock issuable upon exercise of
immediately exercisable options.
69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of Divicore
will consist of 50,000,000 shares of common stock, $.001 par value, and
5,000,000 shares of preferred stock, $.001 par value, covered by the
assumptions contained in the summary. An aggregate of shares of common
stock will be issued and outstanding, excluding shares issued upon exercise of
outstanding options and warrants. No shares of preferred stock will be issued
and outstanding.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock that may come into existence,
the holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of Divicore, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be outstanding
upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
Divicore's board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock of Divicore with any
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of preferred stock may possess voting,
dividend, liquidation and redemption rights superior to that of the common
stock. The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching Divicore's board
of directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of Divicore. Divicore has no present plans to issue any shares of or
designate any series of preferred stock.
Warrants
At March 31, 1999, there were warrants outstanding to purchase a total of
1,608,172 shares of common stock on an as-converted basis, including:
. Warrants to purchase 34,970 and 20,982 shares of common stock at
$0.7473 per share, which will expire in June 2003 and November 2003,
respectively.
. Warrants to purchase 12,500, 33,333 and 16,667 shares of common
stock at $3.558 per share, which will expire in June 2004, January
2005 and July 2005, respectively.
. Warrants to purchase 7,500, 20,080 and 10,843 shares of common stock
at $4.98 per share, which will expire in February 2001, March 2001
and April 2001, respectively.
. Warrants to purchase 1,376,452, 40,864, 10,216, 10,216 and 10,216
shares of common stock at $0.06 per share, which will expire in
April 2003, May 2003, July 2003, September 2003 and December 2003,
respectively.
. Warrants to purchase 3,333 shares of common stock at $6.00 per
share, which will expire in April 2003.
70
<PAGE>
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 5,961,046 shares of common stock and the holders of warrants to
purchase up to approximately 1,608,172 shares of common stock will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act of 1933, as amended, or the Securities Act. Under the terms of
the registration rights agreements, if Divicore proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of such registration and are entitled to include shares
of common stock in the registration. The rights are subject to conditions and
limitations, among them the right of the underwriters of an offering subject to
the registration to limit the number of shares included in such registration.
Holders of these rights may also require Divicore to file a registration
statement under the Securities Act of 1933 at its expense with respect to their
shares of common stock, and Divicore is required to use its best efforts to
effect such registration, subject to conditions and limitations. Furthermore,
stockholders with registration rights may require Divicore to file additional
registration statements on Form S-3, subject to conditions and limitations.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Divicore's certificate of incorporation authorizes the board to establish
one or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance without stockholder action. See
"--Preferred Stock." The certificate of incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders
and not by written consent. In addition, the certificate of incorporation and
bylaws do not permit stockholders of Divicore to call a special meeting of
stockholders. Only Divicore's Board of Directors are permitted to call a
special meeting of stockholders. The certificate of incorporation also provides
that the Board of Directors is divided into three classes, with each director
assigned to a class with a term of three years, and that the number of
directors may only be determined by the board of directors. The bylaws also
require that stockholders give advance notice to Divicore's Secretary of any
nominations for director or other business to be brought by stockholders at any
stockholders' meeting, and that the Chairman has the authority to adjourn any
such meeting. The bylaws also require a supermajority vote of members of the
Board of Directors and/or stockholders to amend certain bylaw provisions. These
provisions of the restated certificate of incorporation and the bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of Divicore. These provisions also may have the effect of preventing
changes in the management of Divicore. See "Risk Factors--We have adopted
certain anti-takeover provisions."
Divicore is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
71
<PAGE>
. on or subsequent to that date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The Transfer Agent and Registrar for Divicore's common stock is BankBoston,
N.A.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the common
stock. Future sales of substantial amounts of common stock (including shares
issued upon exercise of outstanding options or warrants) in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of Divicore to raise equity capital in the future.
Upon completion of this offering, Divicore will have shares of
common stock outstanding assuming no exercise of options and warrants after
March 31, 1999. Of the total outstanding shares of common stock, the
shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of Divicore, as that term is defined in
Rule 144 under the Securities Act, may generally only be sold pursuant to an
effective registration statement under the Securities Act or in compliance with
the limitations of Rule 144 as described below.
The remaining shares of common stock are "restricted
securities" as that term is defined in Rule 144. The restricted shares will be
available for sale in the public market following the expiration of the 180 day
lock-up agreement further described below. In addition, the holders of warrants
for 1,659,251 shares of common stock can exercise these warrants at any time,
but these shares cannot be sold until the expiration of the 180 day lockup
period following the date of this prospectus. Upon expiration of these
agreements, approximately shares (including shares issuable upon
exercise of warrants) will be eligible for immediate resale in the public
market subject to the volume and other limitations of Rule 144, and
approximately shares will be eligible for immediate resale pursuant to Rule
144(k) without such limitations, unless they are held by affiliates of
Divicore. Beginning 180 days after the date of this prospectus the holders of
restricted shares and the holders of warrants for 1,659,251
shares of common stock are entitled to certain rights with respect to
registration of these shares for sale in the public market. If these holders
sell in the public market these sales would have a material adverse effect on
the market price of the common stock.
All of the officers and directors and substantially all of the
securityholders of Divicore have entered into contractual "lock-up" agreements
generally providing that, subject to certain limited exceptions, they will not
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc. subject to certain limited exceptions.
Bear, Stearns & Co. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
When determining whether or not to release shares from the lock-up agreements,
Bear, Stearns & Co. will consider, among other factors, the stockholder's
reasons for requesting the release, the number of shares for which the release
is being requested and market conditions at the time. Following the expiration
of the 180-day lock-up period, all shares of common stock will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of Divicore
or a person (or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year, (including the holding period of any
prior owner other than a person who may be deemed an affiliate of Divicore) is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of 1% of the then-outstanding shares of
common stock (approximately shares after giving effect to this
offering) and the average weekly trading volume of the common stock on The
Nasdaq National Market during the four calendar weeks preceding the filing of a
Form 144 notice with respect to this sale. Sales under
73
<PAGE>
Rule 144 of the Securities Act are subject to certain restrictions relating to
manner of sale, notice and the availability of current public information about
Divicore. Under Rule 144(k), a person who is not an affiliate of Divicore at
any time during the ninety days preceding a sale, and who has beneficially
owned shares for at least two years (including the holding period of any prior
owner other than a person who may be deemed an affiliate of Divicore), would be
entitled to sell these shares immediately following this offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent may
require an opinion of counsel that a proposed sale of shares comes within the
terms of Rule 144 of the Securities Act prior to effecting a transfer of these
shares.
Divicore intends to file, after consummation of this offering, a
registration statement on Form S-8 under the Securities Act covering all shares
of common stock reserved for issuance under its 1999 Stock Incentive Plan and
its 1999 Employee Stock Purchase Plan. See "Management-Benefit Plans." Any
shares registered under such registration statement would be available for sale
in the open markets in the future unless these shares are subject to vesting
restrictions with Divicore or the contractual restrictions described above.
74
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation, and Volpe Brown Whelan & Company, LLC
are acting as representatives, have severally agreed with Divicore, subject to
the terms and conditions of the Underwriting Agreement (the form of which has
been filed as an exhibit to the Registration Statement on Form S-1 of which
this prospectus is a part), to purchase from Divicore the aggregate number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
SG Cowen Securities Corporation..................................
Volpe Brown Whelan & Company, LLC................................
----
Total..........................................................
====
</TABLE>
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. Divicore has agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the underwriters may be required to make in respect
of such liabilities.
Divicore has been advised that the underwriters propose to offer the shares
of common stock directly to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain selected dealers
at such price less a concession not to exceed $ per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed. The common stock is offered subject to receipt and acceptance
by the underwriters, and to various other conditions, including the right to
reject orders in whole or in part. The representatives of the underwriters have
advised Divicore that the underwriters do not expect to confirm sales to any
accounts over which they exercise discretionary authority.
Divicore has granted to the underwriters an option to purchase in the
aggregate up to additional shares of common stock to be sold in
this offering solely to cover over-allotments, if any. The option may be
exercised in whole or in part at any time within 30 days after the date of this
prospectus. To the extent the option is exercised, the underwriters will be
severally committed, subject to certain conditions, including the approval of
certain matters by counsel, to purchase the additional shares of common stock
in proportion to their respective purchase commitments as indicated in the
preceding table.
The following table shows the per share and total underwriting discounts and
commission to be paid to the underwriters by Divicore. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
Total............................................... $ $
</TABLE>
75
<PAGE>
The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business affiliates and related
persons of Divicore who have expressed an interest in purchasing shares. The
number of shares available for sale to the general public will be reduced to
the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
Divicore, its executive officers, directors and substantially all of its
securityholders have agreed that, subject to certain limited exceptions, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc., they will not:
. directly or indirectly, issue, sell, offer or agree to sell or
otherwise dispose of any shares of Divicore common stock (or
securities convertible into, exchangeable for or evidencing the
right to purchase shares of common stock);
. nor enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the
economic consequence of Divicore ownership of Divicore common stock,
whether any such swap transaction is to be settled by delivery of
common stock or other securities, in cash or otherwise, or exercise
their rights, as applicable, to require Divicore to register common
stock.
The restrictions described in the previous paragraph do not apply to:
. transactions by any person other than Divicore relating to shares of
common stock or other securities acquired in open market
transactions after the completion of this offering; or
. certain specified transfers, provided that, following such
transfers, the transferees are subject to transfer restrictions
similar to those described above.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among Divicore and the representatives of the
underwriters. Among the factors considered in making such determination were
Divicore's financial and operating history and condition, market valuations of
other companies engaged in activities similar to Divicore's, Divicore's
prospects and prospects for the industry in which it does business in general,
the management of Divicore, prevailing equity market conditions and the demand
for securities considered comparable to those of Divicore.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by Divicore. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
76
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Divicore by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of Divicore Inc. as of
December 31, 1997 and 1998 and for each of the years in the three year period
ended December 31, 1998 and the financial statements of Viona Development Hard
& Software Engineering GmbH as of and for the year ended December 31, 1997 have
been included in this prospectus and in the registration statement in reliance
upon the reports of KPMG LLP and KPMG Deutsche Treuhand-Gesellschaft AG,
respectively, independent certified public accountants, appearing elsewhere in
this prospectus, and upon the authority of said firms as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549 (the "Commission"), under the Securities Act, as amended, a registration
statement on Form S-1 relating to the common stock offered. This prospectus
does not contain all of the information set forth in the registration statement
and its exhibits and schedules. For further information with respect to
Divicore and the shares we are offering pursuant to this prospectus you should
refer to the registration statement, including its exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and you
should refer to the copy of that contract or other document filed as an exhibit
to the registration statement or any other document. You may inspect a copy of
the registration statement without charge at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or
at the Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor,
Los Angeles, California 90036. The Commission maintains an Internet site that
contains reports, proxy information statements and other information regarding
registrants that file electronically with the Commission. The Commission's
World Wide Web address is www.sec.gov.
Divicore intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. Divicore intends to furnish these other reports
as it may determine or as may be required by law.
Information contained in Divicore's World Wide Web site is not a prospectus
and does not constitute a part of this prospectus.
77
<PAGE>
DIVICORE INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
Divicore Inc.
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998, and March 31,
1999 (unaudited)..................................................... F-3
Consolidated Statements of Operations, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficiency, Years
ended December 31, 1996, 1997 and 1998, and the three months ended
March 31, 1999 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Viona Development Hard & Software Engineering GmbH
Independent Auditors' Report.......................................... F-26
Balance Sheet, December 31, 1997...................................... F-27
Statement of Operations, Year ended December 31, 1997................. F-28
Statement of Changes in Stockholders' Equity, Year ended December 31,
1997................................................................. F-29
Statement of Cash Flows, Year ended December 31, 1997................. F-30
Notes to Financial Statements......................................... F-31
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information............................. F-35
Unaudited Pro Forma Combined Statement of Operations, Year ended
December 31, 1998.................................................... F-36
Notes to Unaudited Pro Forma Combined Financial Statements............ F-37
</TABLE>
F-1
<PAGE>
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position
to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Divicore Inc.:
We have audited the accompanying consolidated balance sheets of Divicore
Inc. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' deficiency, and
cash flows for each of the years in the three-year period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Divicore
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania
April 27, 1999, except as to the last paragraph of Note 19, which is as of
April , 1999
F-2
<PAGE>
DIVICORE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 607 $ 1,024 $ 2,175
Accounts receivable, net of allowance for
doubtful accounts of $467 in 1997 and $265
in 1998 and 1999............................. 999 11,111 6,614
Inventory..................................... 619 1,296 3,783
Prepaid expenses.............................. 38 72 109
-------- -------- --------
Total current assets........................ 2,263 13,503 12,681
Furniture and equipment, net................... 175 875 789
Goodwill and other intangibles, net of
accumulated amortization of $664 in 1998 and
$886 in 1999.................................. -- 2,881 2,659
Debt issuance costs, net of accumulated
amortization of $22 in 1997, $62 in 1998 and
$64 in 1999................................... 65 25 23
Loan receivable--officer....................... -- 60 60
Other assets................................... 66 30 27
-------- -------- --------
Total assets................................ $ 2,569 $ 17,374 $ 16,239
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.............................. $ 4,675 $ 9,916 $ 8,983
Secured borrowings............................ 278 -- --
Bank line of credit........................... 998 -- 1,252
Bridge loan................................... 1,500 -- --
Deferred revenue.............................. 126 -- --
Accrued expenses and other.................... 279 1,114 862
Other current liabilities..................... 44 2,560 2,060
Loan payable--officer......................... 4 -- --
Current installments of obligations under
capital leases............................... 17 13 13
-------- -------- --------
Total current liabilities................... 7,921 13,603 13,170
Subordinated notes payable..................... 625 625 625
Other long-term liabilities.................... 89 788 350
Obligations under capital leases, excluding
current installments.......................... 18 5 2
-------- -------- --------
Total liabilities........................... 8,653 15,021 14,147
-------- -------- --------
Commitments and contingencies (note 13)
Mandatory redeemable convertible preferred
stock, $.06 par value; 31,523,684 shares
authorized; none outstanding in 1997,
3,913,072 Class B outstanding in 1998 and
1999; liquidation preference of approximately
$19,487 at 1998 and 1999; net of subscription
receivable of $625 for 125,502 shares at 1998
and 1999 ..................................... -- 14,589 14,871
Stockholders' deficiency:
Common stock, $.06 par value (80,000,000
shares authorized; 2,103,653, 3,520,851 and
3,520,851 shares issued in 1997, 1998 and
1999)........................................ 126 211 211
Additional paid-in capital.................... 3,949 13,643 14,147
Deferred stock compensation................... -- (749) (1,182)
Accumulated deficit........................... (10,159) (24,596) (25,189)
Accumulated other comprehensive income........ -- (25) (46)
Treasury stock at cost, 200,000 shares........ -- (720) (720)
-------- -------- --------
Total stockholders' deficiency.............. (6,084) (12,236) (12,779)
-------- -------- --------
Total liabilities and stockholders'
deficiency................................. $ 2,569 $ 17,374 $ 16,239
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DIVICORE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing............. $ 335 $ 1,335 $ 2,770 $ -- $ 1,985
Services.............. 490 110 677 10 305
Hardware.............. 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues...... 4,195 6,821 30,288 3,143 10,812
Cost of revenues........ 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit........ 1,059 (1,582) 5,742 66 3,413
Research and
development............ 1,034 1,828 3,121 498 1,465
Sales and marketing..... 731 1,158 1,964 465 1,062
General and
administrative......... 1,198 1,710 4,673 505 837
Depreciation and
amortization........... 46 86 906 15 314
Compensation related to
stock options.......... -- 1,408 139 -- --
Acquired in-process
research and
development............ -- -- 7,900 -- --
--------- --------- --------- --------- ---------
Operating loss...... (1,950) (7,772) (12,961) (1,417) (265)
Other (income) expense:
Interest expense,
net.................. 105 197 722 127 45
Other income.......... -- (716) -- -- --
--------- --------- --------- --------- ---------
Net loss................ (2,055) (7,253) (13,683) (1,544) (310)
--------- --------- --------- --------- ---------
Accretion of discount on
mandatory redeemable
preferred stock........ -- -- 754 -- 283
--------- --------- --------- --------- ---------
Loss attributable to
common stockholders.... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
========= ========= ========= ========= =========
Basic and diluted net
loss per common share.. $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation (basic and
diluted)............... 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DIVICORE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Deferred other Total
---------------- paid-in stock Accumulated comprehensive Treasury stockholders'
Shares Amount capital compensation deficit income stock deficiency
--------- ------ ---------- ------------ ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995....... 1,545,856 $ 44 $ 32 $ -- $ (851) $ -- $ -- $ (775)
Issuance of common
stock................... 444,464 23 1,881 -- -- -- -- 1,904
Adjustment for stock
splits.................. -- 52 (52) -- -- -- -- --
Issuance of warrants to
acquire 501,808 shares
of Class A
preferred stock......... -- -- 3 -- -- -- -- 3
Net loss................ -- -- -- -- (2,055) -- -- (2,055)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1996....... 1,990,320 119 1,864 -- (2,906) -- -- (923)
Issuance of common
stock................... 113,333 7 619 -- -- -- -- 626
Issuance of warrants to
acquire shares of common
stock................... -- -- 57 -- -- -- -- 57
Compensation related to
stock options........... -- -- 1,409 -- -- -- -- 1,409
Net loss................ -- -- -- -- (7,253) -- -- (7,253)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1997....... 2,103,653 126 3,949 -- (10,159) -- -- (6,084)
Issuance of warrants in
connection with debt
financing............... -- -- 68 -- -- -- -- 68
Issuance of warrants in
connection with the sale
of Class B preferred
stock, net of
transaction costs....... -- -- 3,754 -- -- -- -- 3,754
Issuance of common stock
to acquire Viona........ 1,204,820 72 4,699 -- -- -- -- 4,771
Repurchase of common
stock................... -- -- -- -- -- -- (720) (720)
Deferred stock
compensation related to
stock options........... -- -- 799 (799) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 50 -- -- -- 50
Compensation related to
stock options........... -- -- 139 -- -- -- -- 139
Issuance of common stock
as consideration for
interest payments....... 12,962 1 64 -- -- -- -- 65
Issuance of common stock
upon exercise of
warrants................ 199,416 12 171 -- -- -- -- 183
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- -- -- (754) -- -- (754)
Foreign currency
translation adjustment.. -- -- -- -- -- (25) -- (25)
Net loss................ -- -- -- -- (13,683) -- -- (13,683)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1998....... 3,520,851 211 13,643 (749) (24,596) (25) (720) (12,236)
Deferred stock
compensation related to
stock options........... -- -- 504 (504) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 71 -- -- -- 71
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- -- -- (283) -- -- (283)
Foreign currency
translation adjustment.. -- -- -- -- -- (21) -- (21)
Net loss (unaudited).... -- -- -- -- (310) -- -- (310)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of March 31,
1999 (unaudited)........ 3,520,851 $211 $14,147 $(1,182) $(25,189) $ (46) $(720) $(12,779)
========= ==== ======= ======= ======== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DIVICORE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,055) $(7,253) $(13,683) $(1,544) $ (310)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 46 86 906 15 314
Noncash compensation and
other expenses......... 1 1,367 414 28 74
Acquired in-process
research and
development............ -- -- 7,900 -- --
Changes in items
affecting operations:
Accounts receivable... (598) (229) (10,112) (1,380) 4,497
Inventory............. (258) (15) (677) (1,806) (2,487)
Loan receivable--
officer.............. -- -- (60) -- --
Prepaid expenses...... (198) 167 (34) 3 (37)
Accounts payable...... 461 3,686 5,241 2,387 (933)
Deferred revenue...... 550 (424) (126) -- --
Accrued expenses and
other................ 71 142 549 176 (253)
------- ------- -------- ------- ------
Net cash provided by (used
in) operating activities.. (1,980) (2,473) (9,682) (2,121) 865
------- ------- -------- ------- ------
Cash flows from investing
activities:
Capital expenditures...... (110) (26) (813) (57) (78)
Proceeds from sale of
furniture and
equipment................ -- -- -- -- 86
Acquisition, net of cash
acquired................. -- -- (3,231) -- --
------- ------- -------- ------- ------
Net cash provided by (used
in) investing activities.. (110) (26) (4,044) (57) 8
------- ------- -------- ------- ------
Cash flows from financing
activities:
Repayments under capital
lease obligations........ (14) (14) (18) (4) (3)
Secured borrowings
(repayments)............. -- 278 (278) 1,198 --
Proceeds from bridge
loans.................... -- 1,500 3,320 2,520 --
Proceeds from
subordinated notes
payable.................. 50 -- -- -- --
Net proceeds from
issuance of common
stock.................... 1,885 626 183 -- --
Net proceeds from Class B
preferred stock.......... -- -- 12,769 -- --
Net borrowings
(repayments) under bank
line of credit........... 140 663 (998) 452 1,252
Borrowings (repayments)
under other
liabilities.............. 65 -- (90) -- (950)
Repurchase of common
stock.................... -- -- (720) -- --
------- ------- -------- ------- ------
Net cash provided by
financing activities...... 2,126 3,053 14,168 4,166 299
------- ------- -------- ------- ------
Effect of exchange rate
changes on cash and cash
equivalents............... -- -- (25) -- (21)
------- ------- -------- ------- ------
Net increase in cash and
cash equivalents.......... 36 554 417 1,988 1,151
Cash and cash equivalents:
Beginning of year......... 17 53 607 607 1,024
------- ------- -------- ------- ------
End of year............... $ 53 $ 607 $ 1,024 $ 2,595 $2,175
======= ======= ======== ======= ======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest................. $ 102 $ 133 $ 683 $ 77 $ 62
Noncash investing and
financing activities:
Equipment acquired under
capital lease
obligations............. 18 -- -- -- --
Issuance of warrants in
connection with bank
line of credit and
bridge loans............ 3 57 68 -- --
Issuance of options in
connection with equity
transactions and grants
below fair value........ 150 1,409 139 -- --
Issuance of common stock
and preferred stock as
consideration for
services (1996) and
private placement fees
(1998).................. 19 -- 542 -- --
Amortization of deferred
stock compensation...... -- -- 50 -- 71
Bridge loans converted
to Class B preferred
stock................... -- -- 4,820 -- --
Issuance of common stock
as consideration for
interest................ -- -- 65 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Divicore Inc. (the Company), which is in the process of changing its name
from Quadrant International, Inc., effective May 1999, designs, develops,
licenses and markets core-based modular software solutions that enable digital
video and audio stream management in personal computer systems and consumer
electronic devices. The Company also provides supporting hardware designs to
selected customers as well as customization services and customer support. The
Company's solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk (DVD); direct broadcast
satellite (DBS) and high-definition television (HDTV) on existing personal
computers and consumer electronics platforms. The Company's customers consist
principally of personal computer and consumer electronics manufacturers.
Through 1998 the Company's revenue was substantially generated from selling
hardware-based digital video solutions to personal computer and consumer
electronics manufacturers and through wholesale distributors. The Company has
recently changed its strategic focus from selling a hardware-based digital
video solution to licensing its proprietary technology to provide software-
based digital video solutions to primarily personal computer and consumer
electronics original equipment manufacturers.
The Company was incorporated in Pennsylvania in April 1994.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital. During
1998, the Company sold approximately $18.6 million of its preferred stock.
Management believes that its current funds combined with other available
sources of funding will be sufficient to enable the Company to meet its planned
expenditures through at least December 31, 1999. The Company may require
additional capital to finance its future operations and fund its ongoing
research and development activities beyond 1999. Additional financing may not
be available when needed and, if such financing is available, it may not be
available on terms favorable to the Company.
(b) Unaudited Interim Financial Information
The interim consolidated financial statements of the Company for the three
months ended March 31, 1998 and 1999, included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at March 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1999.
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
F-7
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(d) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.
(e) Inventory
Inventory, which principally consists of finished goods, is valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method (FIFO). Inventory is net of reserves of approximately $400,000 and
$174,000 at December 31, 1997 and 1998, respectively.
(f) Furniture and Equipment
Furniture and equipment are stated at cost. Equipment under capital leases
is stated at the present value of the minimum lease payments. Depreciation and
amortization is calculated on the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Purchased software............................................... 5 years
Computer equipment............................................... 5 years
Research and development equipment............................... 5 years
Furniture and fixtures........................................... 7 years
</TABLE>
(g) Goodwill and Other Intangibles
Goodwill and other intangibles are amortized using the straight-line method
from the date of acquisition over the expected period to be benefited,
estimated at four years. The Company assesses the recoverability of goodwill,
as well as other long-lived assets, based upon expectations of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
(h) Deferred Offering Costs
As of March 31, 1999, specific incremental costs directly attributable to
the planned initial public offering process have been deferred. These costs
will be charged against additional-paid-in-capital in connection with the
consummation of this offering.
(i) Revenue Recognition
Licensing revenues for one-time license fees are recognized in the period in
which the license agreement is signed, delivery of the technology has occurred
and collectibility is probable. Licensing revenues associated with ongoing
licensing agreements are recognized when earned, which is generally based on
receiving notification from licensees stating the number of products sold which
incorporate the licensed technology from the Company and for which license fees
are due.
Revenue is recognized upon shipment of products to customers. An allowance
for returned merchandise is provided based on the Company's historical
experience. Revenue related to services are recognized upon delivery of the
service in the case of time and material contracts. Revenue related to
development contracts involving significant modifications or customization of
hardware or software under unilateral or joint development arrangements is
recognized using the percentage-of-completion method, based on performance
milestones specified in the contract where such milestones fairly reflect
progress toward contract completion. In other instances, progress toward
completion is based on individual contract costs incurred to date compared with
total estimated contract costs. Losses on contracts are recognized when the
loss is apparent.
F-8
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Other income represents amounts received in connection with the cancellation
of a development project by a customer during 1997. A total of approximately
$1,134,000 was received from the customer, of which approximately $418,000 was
recorded as revenue based on costs of revenue incurred. The remaining
approximately $716,000 was recorded in other income as a cancellation fee.
(j) Research and Development Costs
Research and development costs are expensed as incurred.
(k) Income Taxes
In September 1996, the stockholders elected "C" corporation status for
federal and state income tax purposes. Effective with this election, income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards.
(l) Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital lease obligations that
are carried at cost which approximates fair value.
(m) Stock Options
In 1996, the Company adopted SFAS No. 123, Accounting for Stock-based
Compensation, which provides the alternative to adopt the fair value method for
expense recognition of employee stock options and stock-based awards or to
continue to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) with pro forma disclosures of results of operations as if
the fair value method had been applied. The Company has elected to continue to
apply APB 25 for stock options and stock-based awards to employees and has
disclosed pro forma net loss as if the fair value method had been applied (note
12).
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(o) Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
to be held and used by an entity for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
(p) Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
F-9
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
resulting translation adjustments are recorded as a component of stockholders'
deficiency in the accompanying consolidated financial statements.
(q) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS No. 130 during 1998.
(r) Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per
Share
The Company computes earnings per share in accordance with SFAS No. 128,
Computation of Earnings Per Share. In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Dilutive earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method), and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the if-
converted method). Common equivalent shares are excluded from the calculation
if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share, as
if they were outstanding for all periods presented. To date, the Company has
not had any issuances or grants for nominal consideration.
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
the convertible preferred stock (using the if-converted method), which will
automatically convert into common stock upon an IPO as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is anti-dilutive.
F-10
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The following table sets forth the computation of loss per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted loss
per common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $(1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========== ========== ========= ========== ==========
Pro forma loss per
common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========== ========== ========= ========== ==========
</TABLE>
(s) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is
effective for financial statements for the years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The adoption of this standard
did not have a material effect on the Company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard did not have an impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As the Company does not currently engage or plan
to engage in derivative or hedging activities there will be no impact to the
Company's results of operations, financial position or cash flows upon the
adoption of this standard.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
F-11
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company does not expect the adoption of SOP 98-9 to have a
material effect on its financial condition or results of operations.
(2) Comprehensive Income
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three months
ended
Years ended December 31, March 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Net loss....................... $(2,055) $(7,253) $(13,683) $(1,544) $(310)
Foreign currency translation
adjustment.................... -- -- (25) -- (21)
------- ------- -------- ------- -----
Comprehensive loss........... $(2,055) $(7,253) $(13,708) $(1,544) $(331)
======= ======= ======== ======= =====
</TABLE>
(3) Furniture and Equipment
Furniture and equipment consist of the following at December 31, 1997 and
1998, and March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Furniture and fixtures................................... $ 27 $ 292 $ 288
Leasehold improvements................................... -- 67 72
Computer equipment....................................... 124 547 543
Research and development equipment....................... 122 333 301
Software................................................. 13 138 144
---- ------ ------
286 1,377 1,348
Less: accumulated depreciation........................... 111 502 559
---- ------ ------
Furniture and equipment, net............................. $175 $ 875 $ 789
==== ====== ======
</TABLE>
(4) Acquisition
In April 1998, the Company completed the acquisition of Viona Development
Hard & Software Engineering GmbH (Viona) a company located in Karlsruhe,
Germany specializing in the development of digital video technology.
The Company paid a total of $11.4 million consisting of: $5.8 million in
cash, of which $2.6 million was paid at closing, $2.1 million will be paid
during 1999, and $1.35 million, recorded at a discounted value of $1.1 million,
will be paid in equal installments at the end of each of the next three fiscal
years; issued 1,204,820 shares of the Company's common stock valued at $4.8
million; and incurred transaction costs of $0.8 million.
F-12
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The acquisition of Viona was recorded under the purchase method of
accounting. The results of operations of Viona have been included in the
Company's consolidated financial statements from April 1, 1998. A portion of
the purchase price was allocated to in-process research and development
technology, which resulted in a charge of approximately $7.9 million to the
Company's operations in April 1998. At the date of acquisition, Viona had five
development projects that had not reached technological feasibility and for
which there was no alternative future use. The in-process research and
development technology was valued using a cash flow model, under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted using a 30%-35%
discount rate for risks, probabilities and uncertainties, including the stage
of development of the technology, viability of target markets and other
factors. The five development projects ranged in percentage of completion at
the date of acquisition from 5% to 80%.
The excess of the purchase price over the fair value of the net identifiable
assets and in-process research and development technology acquired of $3.5
million has been recorded as goodwill and other intangibles and is amortized on
a straight-line basis over four years.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired (primarily fixed assets).............. $ 542
Goodwill............................................................ 3,503
Workforce in place.................................................. 42
In-process research and development technology...................... 7,900
Liabilities acquired................................................ (557)
-------
$11,430
=======
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Viona as if the acquisition
occurred on January 1, 1997, after giving effect to certain adjustments,
primarily amortization of goodwill and excluding the $7.9 million write-off of
acquired in-process research and development. The unaudited pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisition been completed on January 1, 1997.
<TABLE>
<CAPTION>
Year ended
December 31,
(in thousands
except per
share data)
----------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................. $ 6,925 $30,288
Net loss.................................................. $(8,075) $(5,978)
Net loss per common share (basic and diluted)............. $ (3.92) $ (2.03)
</TABLE>
(5) Bank Line of Credit
In June 1997 the Company refinanced its line of credit with a bank to an
aggregate amount of $1 million, subject to certain borrowing limitations based
on accounts receivable and inventory. The line of credit charged interest at
the prime rate plus 2% (10.5% at December 31, 1997) and was secured by
substantially all the assets of the Company. The bank was provided warrants
(note 12) to acquire 45,833 shares of the Company's common stock at an exercise
price of $3.56 per share. The estimated fair value of the warrants issued was
$33,964 and has been recorded as debt issuance costs. This amount was amortized
over the term of the line of credit. The line of credit required the Company,
among other things, to maintain certain financial ratios,
F-13
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
minimum working capital and tangible net worth on a quarterly basis. The
Company was not in compliance with these covenants at December 31, 1997. In
April 1998, the Company received a waiver of these covenant violations from the
bank and issued warrants to the bank to acquire 16,667 shares of the Company's
common stock at an exercise price of $3.56 per share. The estimated fair value
of the warrants issued is $22,600 and has been recorded as interest expense.
In July 1998, the Company executed a Loan and Security Agreement (the Loan
Agreement) with a commercial bank that provides the Company a line of credit
(the Credit Line) in the amount of the lesser of $5 million or the borrowing
base, as defined, (principally limited to a percentage of eligible accounts
receivable and eligible inventory). The Credit Line provides for the Company to
issue a maximum of $2 million in the form of letters of credit which reduces
the amount of available borrowings under the Credit Line. The Credit Line
matures in July 2000 and bears interest at the prime rate plus 1% (8.75% at
December 31, 1998). The Credit Line is collateralized by substantially all of
the assets of the Company. The Company is required to comply with a tangible
net worth covenant, as defined in the Loan Agreement, and was not in compliance
with this covenant at December 31, 1998 and March 31, 1999. The Company
received a waiver of this covenant violation in April 1999. There was no amount
and approximately $1,252,000 outstanding under the Credit Line at December 31,
1998 and March 31, 1999, respectively, and approximately $3,510,000 and
$1,696,000 was available under the terms of the Credit Line at December 31,
1998 and March 31, 1999, respectively.
At December 31, 1998 and March 31, 1999, there were approximately $1,490,000
and $500,000 of letters of credit outstanding, respectively.
(6) Bridge Financing
In December 1997 the Company entered into an agreement to borrow $1.5
million of short-term bridge loans. The loans bear interest at 6% with an
original maturity date of March 31, 1998. The term of the debt was extended to
April 30, 1998, and the interest rate was increased to 15%. In connection with
this financing, the Company issued warrants (note 12) to acquire 45,000 shares
of the Company's common stock. The estimated fair value of the warrants issued
was approximately $23,000. This amount has been recorded as debt issuance costs
and was amortized over the term of the debt.
In February, March and April 1998 the Company entered into various
agreements to borrow additional amounts of short-term bridge loans aggregating
$3.32 million. The terms of the debt were substantially identical with the
amount borrowed in December 1997. The Company issued warrants (note 12) to
acquire 48,182 shares of the Company's common stock at an exercise price equal
to the price per share at the time of closing of the Company's round of equity
financing in April 1998. The estimated fair value of the warrants issued was
approximately $46,000 and has been recorded as additional interest expense
through the date of the conversion of the bridge loans into Class B preferred
stock.
The $4.82 million of short-term bridge loans were converted to Class B
preferred stock in April 1998 (note 11).
F-14
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(7) Accrued Expenses
<TABLE>
<CAPTION>
December
31,
----------- March 31,
1997 1998 1999
---- ------ ---------
(in thousands)
<S> <C> <C> <C>
Accrued compensation and related costs................. $ 5 $ 439 $440
Accrued interest....................................... 80 127 141
Other.................................................. 194 548 281
---- ------ ----
$279 $1,114 $862
==== ====== ====
</TABLE>
(8) Loan Payable/Receivable--Officers
At December 31, 1997, approximately $4,000 was owed from an original amount
of approximately $111,000 to the former Chief Executive Officer of the Company.
The amount was repaid in full during 1998.
At December 31, 1998, the Company has a loan receivable in the amount of
$60,000 due from an officer of the Company. The term of the loan receivable is
three years and is non-interest bearing. The Company has agreed to forgive the
loan in its entirety in the event the Company completes an IPO.
(9) Other Liabilities
In October 1995 the Company entered into an emerging company funding
agreement with the Ben Franklin Technology Center of Southeastern Pennsylvania
(the Center). The Center had agreed to provide up to $100,000 to the Company
during the period November 1, 1995 to June 30, 1996. Any amounts funded by the
Center were to be used by the Company for the development of certain laptop
computer video capture products. The total amount funded by the Center was
repayable quarterly. The total amount outstanding as of December 31, 1997 was
$90,000. The amount was repaid in full during 1998.
During 1997 the Company entered into a factoring arrangement for which
approximately $278,000 of accounts receivables had been pledged as collateral
with recourse to the Company. The effective interest rate on such secured
borrowings was approximately 30% at December 31, 1997. The Company discontinued
the factoring arrangement during 1998.
In connection with the Company's acquisition of Viona during 1998 (note 4),
$1.35 million of the purchase price, recorded at a present value of $1.1
million, is payable in equal annual installments over the next three years. As
such, $0.4 million of the amount is included in other current liabilities with
the remaining amount included in other long-term liabilities.
(10) Subordinated Notes Payable
Subordinated notes payable at December 31, 1997 and 1998 and March 31, 1999,
consist of $625,000 of various subordinated notes payable (the Notes) to NEPA
Venture II, L.P. (NEPA) due May 4, 2003 to November 29, 2003 with a 9% interest
rate.
The Notes are part of two transactions entered into in May 1995 and March
1996 to provide financing to the Company. Interest on the Notes is payable
quarterly. In connection with the issuance of the Notes, the Company issued
warrants to acquire a total of 920,006 shares of the Company's Class A
mandatory redeemable
F-15
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
convertible preferred stock at exercise prices of $0.60-$0.75 per share (note
13). The estimated fair value of the warrants issued is $30,010 and is
amortized over the term of the related debt. In addition, NEPA obtained board
representation and certain other rights which include piggyback and demand
registration rights in certain circumstances following an initial public
offering.
(11) Equity Transactions and Capital Stock
Capital Stock and Stock Splits
The board of directors of the Company amended the Company's Articles of
Incorporation in April 1998 to increase the authorized common shares to
80,000,000, to increase the authorized Class A mandatory redeemable convertible
preferred shares to 6,523,684 and authorized 25,000,000 shares of Class B
mandatory redeemable convertible preferred shares (collectively, Preferred
Stock).
In August and October 1996 the board of directors authorized a 1.929-to-1
and a 1.088-to-1 stock split, respectively, including common and preferred
shares. The splits coincided with the private placement transactions described
below.
All share and per share information included in the accompanying
consolidated financial statements and notes has been adjusted to give effect to
the stock splits noted above.
Common Stock
In August and October 1996 the Company raised a total of $2 million through
a private placement of 347,936 shares of common stock. In connection with this
transaction, the Company paid $200,000 as a placement fee, and issued options
to purchase 66,151 shares of common stock at an average exercise price of $4.26
per share to a former director of the Company (note 17). The fair value of the
common stock on the date of grant was estimated to be $6.00. The options vested
immediately. The $200,000 of offering costs and the $150,450 value of the
options granted at below fair value have been recorded in additional paid-in
capital as costs of the equity transaction.
During April through July 1996 the Company also sold 21,076 shares of common
stock for a total of $55,000, the estimated fair market value per share of the
Company's common stock on the date of the transaction, to two employees of the
Company. In January 1996, the Company sold 7,347 shares of common stock for a
total of $30,000, the estimated fair market value per share of the Company's
common stock on the date of the transaction. In addition, in January 1996 an
employee was given 31,373 shares of the Company's common stock as consideration
for previously accrued unpaid wages aggregating $18,750.
In March and April 1997 the Company raised a total of $500,000 through a
private placement of 83,333 shares of the Company's common stock. In connection
with this transaction, the Company issued options to purchase 10,417 shares of
the Company's common stock at an exercise price of $4.50 per share to a
director of the Company that was actively involved in this fund raising
process. The options vested immediately. The $15,625 value of the options
granted at below fair value has been recorded in additional paid-in-capital as
costs of the equity transaction.
In September and October 1997 the Company sold 30,000 shares of common stock
for $207,300 in a private transaction to unrelated third parties.
F-16
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In April 1998 the Company purchased 200,000 shares of common stock for $3.60
per share or $720,000 in the aggregate from the former CEO of the Company.
Preferred Stock
In April 1998 the Company sold 3,728,916 shares of Class B mandatory
redeemable convertible preferred stock (Class B) for an aggregate amount of
approximately $18.6 million including the conversion of $4.82 million of bridge
notes (note 6). In addition, the investors in the Class B received an aggregate
1,517,668 warrants (note 12) to acquire common stock at an exercise price of
$0.06. The estimated fair value of the warrants of $5.7 million has been
recorded as additional paid-in capital.
The Preferred Stock has a non-cumulative dividend rate equal to 8% of the
original purchase price which shall become due and payable when and if declared
by the board of directors of the Company. To date, no dividends have been
declared by the board of directors. The holders of the Preferred Stock have
demand and piggyback registration rights as defined.
Holders of Preferred Stock have the option to convert such shares into
shares of common stock on a 1:1 ratio. The conversion rate on a particular
class of Preferred Stock is subject to an adjustment in the event that any
additional common stock, or other shares convertible into common stock, are
issued for a per share price less than the particular class conversion price.
Mandatory conversion occurs upon the closing of an IPO of the Company's common
stock, as defined. The Class B is senior to the Company's Class A in
liquidation and the holders of Class A and B are entitled to receive an amount
equal to their respective redemption price prior to the distribution to the
common shareholders. At any time after May 4, 2003, each holder of shares of
Preferred Stock, may at their option, require the Company to redeem all or part
of their preferred shares.
The Preferred Stock votes on an as if converted basis. The Class B
shareholders have the right to elect one member of the board of directors of
the Company.
In April 1998, in connection with the Company's sale of Class B, the Company
paid $1.1 million in cash, issued 108,856 shares of the Company's Class B and
issued 44,304 warrants (note 13) to acquire common stock at an exercise price
of $0.06 to the Company's placement agent as consideration for services
provided in connection with the equity transaction. The shares and warrants had
an estimated fair value of $542,100. The above amounts as well as $0.3 million
of other transaction costs were recorded as costs of the equity transaction and
charged against additional paid-in capital.
Preferred stock consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
Per share 1997 1998
liquidation ------------------------
value Authorized Issued and outstanding
----------- ---------- ------------------------
<S> <C> <C> <C> <C>
Preferred class
Class A..................... $0.678 6,523,684 -- --
Class B..................... $4.98 25,000,000 -- 3,913,072
---------- -------- --------------
31,523,684 -- 3,913,072
========== ======== ==============
</TABLE>
At December 31, 1998, 4,833,078 shares of common stock are reserved for the
conversion of Preferred Stock.
F-17
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Preferred Stock Subscription
In March 1998, the Company entered into a subscription and technology
license agreement (the Agreement). The Agreement provides, among other things,
for the Company to license certain technology to an unrelated third party (the
licensee). In connection with this Agreement, the licensee is required to pay a
minimum of $750,000 at the end of each calendar quarter during the first year
and a minimum of $900,000 at the end of each calendar quarter during the second
year. Included in the first year quarterly payments is $125,000 per quarter
that will be applied towards the purchase of the Company's Class B preferred
stock at $4.98 per share. The quarterly payment for the fourth quarter of the
second year includes $500,000 that will be applied towards the purchase of the
Company's Class B preferred stock at $4.98 per share. The purchase of the
preferred stock under this Agreement is on the same terms as the licensee's
purchase of Class B preferred stock in April 1998. The $625,000 minimum
quarterly royalty payments in year one will be recognized as revenue during
each respective quarter. The $900,000 minimum quarterly payments for each of
the first three quarters and the $400,000 for the fourth quarter of the second
year will be recognized as revenue during each of those respective quarters.
As of December 31, 1998, the Company has issued 75,301 shares of Class B
preferred stock under this Agreement.
In April 1999 the Company issued 25,100 shares of Class B preferred stock
under this Agreement. In addition, the Company amended the above agreement and
issued 100,402 shares of Class B preferred stock and warrants for the purchase
of 51,079 shares of common stock in exchange for which it received a promissory
note with an aggregate value of $500,000 due in April 2000. The $500,000 note
reflects the payment due in the fourth quarter of the second year of the above
Agreement.
(12) Stock Options and Warrants
(a) Stock Options
The Company adopted the 1995 Stock Option Plan (the 1995 Plan) in May 1995.
The 1995 Plan provides for the grant of incentive stock options and non-
qualified stock options to employees, consultants, advisors to the Company, and
members of the Board of Directors to purchase shares of common stock. Prior to
the adoption of the 1995 Plan, 43,258 options were granted to employees. Under
the terms of the 1995 Plan, authorized options are granted at estimated fair
value. The options generally vest over a period ranging from 2 to 5 years and
expire 5 to 10 years from the grant date.
In the months of November and December 1995, five Company managers deferred
payment of their salaries, aggregating approximately $42,000, for a period of
four years which is recorded as accrued compensation payable and is non-
interest bearing. In connection with their deferral of salaries, these managers
received a total of 50,510 non-qualified stock options to acquire shares of
common stock of the Company at an exercise price of $0.60, the estimated fair
value at the date of grant. These options were not issued in connection with
the 1995 Plan. The options become exercisable 20% per year commencing with the
grant date and on January 1 of each year thereafter.
In September 1997 the Company granted 728,398 options, outside the 1995
Plan, to employees and certain vendors to purchase common stock at exercise
prices ranging from $1.50 to $6.00 per share. The options vest over a range of
periods from immediately to 4 years and expire in 5 years. Of these options,
299,315 were issued to employees at below fair value or to vendors which
resulted in a noncash charge to operations for the year ended December 31, 1997
of approximately $1,409,000.
In 1998 the Board of Directors approved an amendment to the Company's 1995
Stock Option Plan in which the total number of options available for grant was
increased to 8,500,000.
F-18
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In September 1998 the Company granted 783,333 options, outside the 1995
Plan, to employees of Viona at an exercise price of $1.50 which was below the
estimated fair value of the Company's common stock on the date of grant. The
Company recorded deferred stock compensation of $799,000 in connection with
these options which will be amortized over the options' vesting period.
On September 23, 1998 the Company, with the approval of the board of
directors, repriced all of the outstanding employee stock options that were in
excess of $2.52 to $2.52.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of beginning
of year................ 167,233 $0.54 223,040 $1.92 974,764 $ 3.60
Options granted....... 129,272 3.12 751,724 4.14 1,149,513 1.74
Options canceled...... (29,385) 0.72 -- -- (10,325) (0.90)
Options exercised..... (44,080) 0.72 -- -- -- --
------- ----- ------- ----- --------- ------
223,040 $1.92 974,764 $3.60 2,113,952 $ 1.80
======= ===== ======= ===== ========= ======
</TABLE>
At December 31, 1998, 1,055,630 options with a weighted-average exercise
price of $1.80, were fully vested and exercisable.
The following summarizes information about the Company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------------------
Weighted Weighted
average average
Number remaining Weighted Number remaining Weighted
outstanding at contractual average outstanding at contractual average
Range of December 31, life exercise December 31, life exercise
exercise prices 1998 (years) price 1998 (years) price
--------------- -------------- ----------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .03- .75.............. 216,810 4.2 $0.48 203,257 4.0 $0.48
$ .76-1.50.............. 1,087,338 4.6 1.50 351,088 4.9 1.50
$1.51-3.00.............. 792,951 4.1 2.52 484,618 4.0 2.52
$3.01-6.00.............. 16,853 3.8 6.00 16,667 3.8 6.00
--------- ----- --------- -----
Totals................ 2,113,952 $1.80 1,055,630 $1.80
========= ===== ========= =====
</TABLE>
The Company applies APB 25 and related interpretations in accounting for
its stock option plan. Had compensation cost been recognized pursuant to SFAS
No. 123, the Company's loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Loss attributable to common stockholders:
As reported................................... $(2,055) $(7,253) $(14,437)
Pro forma..................................... $(2,078) $(7,630) $(14,919)
Loss per common share:
As reported................................... $ (1.19) $ (3.52) $ (4.94)
Pro forma..................................... $ (1.21) $ (3.70) $ (5.11)
</TABLE>
The per share weighted-average fair value of stock options issued by the
Company during 1997 and 1998 was $2.70 and $1.08, respectively, on the date of
grant.
F-19
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The following range of assumptions were used by the Company to determine the
fair value of stock options granted using a minimum value option-price model:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Dividend yield............................................... 0% 0%
Expected volatility.......................................... 0% 0%
Average expected option life................................. 4 years 4 years
Risk-free interest rate...................................... 5.73% 5.15%
</TABLE>
Pro forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma loss amounts presented above because
compensation cost is reflected over an option's vesting period and compensation
cost for options granted prior to January 1, 1996, is not considered.
(b) Warrants
The warrants issued by the Company generally contain customary provisions
requiring proportionate adjustment of the exercise price in the event of a
stock split, stock dividend, or dilutive financing in the case of the warrants
for preferred stock.
A summary of warrant activity follows:
<TABLE>
<CAPTION>
Preferred Common
----------------------- -------------------------
Number Weighted Weighted
of average Number of average
warrants exercise price warrants exercise price
-------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1995............... 836,371 $0.60 34,970 $0.75
Warrants granted...... 83,635 0.75 20,982 0.75
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1996............... 920,006 $0.60 55,952 $0.75
Warrants granted...... -- -- 90,833 3.36
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1997............... 920,006 $0.60 146,785 $2.37
Warrants granted...... -- -- 1,660,802 0.24
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- (199,416) 0.92
------- ----- --------- -----
Balance as of December
31, 1998................ 920,006 $0.60 1,608,171 $0.35
======= ===== ========= =====
</TABLE>
F-20
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(13) Commitments and Contingencies
(a) Leases
The Company is obligated under certain equipment capital leases that expire
at various dates during the next two years. The Company leases its office
facilities and various equipment under operating leases that expire during the
next five years. Future minimum lease payments relating to the noncancelable
capital and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
Year ending December 31,
1999................................................... $15 $291
2000................................................... 5 269
2001................................................... -- 218
2002................................................... -- 161
2003................................................... -- 106
---
Total minimum lease payments......................... 20
Less: amount representing interest................... 2
---
Present value of net minimum capital lease payments...... 18
Less: current installments of obligations under capital
leases.................................................. 13
---
Obligations under capital leases excluding current
installments............................................ $ 5
===
</TABLE>
Total rent expense for the years ended December 31, 1996, 1997 and 1998, was
approximately $107,000, $150,000 and $328,000, respectively, and approximately
$44,000 and $125,000 for the three months ended March 31, 1998 and 1999,
respectively.
(b) Royalties
Under various licensing agreements, the Company is required to pay
royalties, generally on a per unit basis, on the sales of certain products that
incorporate licensed technology. Royalty expense under such agreements was
approximately $188,000, $97,000 and $651,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and approximately $65,000 and $192,000 for
the three months ended March 31, 1998 and 1999, respectively.
(c) Contingencies
The Company is party to certain legal actions arising in the normal course
of business. In addition, the Company is aware that several entities have
asserted that technology which forms an essential part of the industry standard
for DVD and which is incorporated into the Company's DVD solutions, infringes
patents held by such entities. If it is determined that the Company has
infringed these patents, the Company could be liable for damages and may be
required to pay license fees in connection with the use of the technology.
Management of the Company, however, does not believe the resolution of these
potential contingencies will have a material impact on the financial position
or results of operations of the Company.
F-21
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(d) Employment Agreements
The Company has entered into employment agreements with certain officers and
employees of the Company. The agreements are generally for two to three year
periods, generally provide for annual bonuses and incentive stock options as
determined by the Board Directors, and covenants not-to-compete during the
employment term and for two years thereafter. The employment agreements also
generally provide for six months severance in the event the individual is
terminated without cause.
The employment agreement with the Company's President and Chief Executive
Officer signed in August 1997 also provides that to the extent the Company is
sold for in excess of $80 million, he is entitled to a bonus of 2.5% of the
proceeds or $2 million.
(14) Business Risks and Credit Concentration
The Company licenses and sells its products principally in the intensely
competitive personal computer and consumer electronics original equipment
manufacturers industry and for product sales prior to 1998 through a number of
wholesale distributors. This industry has been characterized by price erosion,
rapid technological change, short product life cycles, cyclical market patterns
and heightened foreign and domestic competition. Significant technological
changes in the industry would adversely affect operating results.
The Company performs ongoing credit evaluations of its customers' financial
condition, and generally no collateral is required. The Company had three
customers representing, in the aggregate, 64%, 88% and 71% of accounts
receivable at December 31, 1997 and 1998 and March 31, 1999, respectively.
The Company uses a contract manufacturer to make its hardware products. In
the event the Company is unable to continue its relationship with this
manufacturer, it believes it could establish a similar relationship with
another company in a reasonable period of time. Because of the competitive
nature of the technology industry, the Company believes it could ultimately
obtain terms as beneficial as those currently in effect.
(15) Income Taxes
The Company elected "C" corporation status in September 1996. Prior to that
election, the Company was an "S" corporation.
No federal or state income taxes are due as of December 31, 1997 and 1998.
The components of the net deferred tax assets as of December 31, 1997 and
1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating losses..................................... $ 3,104 $ 5,706
Reserves and accruals not currently deductible........... 270 188
Depreciation/Amortization................................ (3) 3,239
Deferred revenue and other............................... 65 151
------- -------
3,436 9,284
Valuation allowance........................................ (3,436) (9,284)
------- -------
Net deferred tax assets and (liabilities).................. $ -- $ --
======= =======
</TABLE>
F-22
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1997 and 1998.
As of December 31, 1998, the Company has approximately $14.1 million of net
operating loss carryforwards for federal tax purposes. These carryforwards will
begin expiring in 2011 if not utilized. In addition, the Company has net
operating loss carryforwards in certain states with various expiration periods
beginning in 2006.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carryforward period.
(16) Related-Party Transactions
During 1996, the Company paid $10,000 to a director of the Company for
consulting services. In 1997, the Company paid this director a total of
$220,000 for additional consulting services. During 1998, this individual
resigned as a director of the Company and received $220,000 for consulting
services.
In connection with certain equity transactions completed in 1996 (note 11),
this director received remuneration for his services in connection with these
equity transactions.
The former Chief Executive Officer of the Company received $125,000 in
severance payments during 1998.
(17) Defined Contribution Plan
In 1997, the Company established a defined contribution plan for qualified
employees as defined in the Plan. Participants may contribute up to 20% of pre-
tax compensation, as defined. Under the plan, the Company can make
discretionary contributions. To date, the Company has not made any
contributions to the Plan.
F-23
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(18) Segment and Major Customer Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which established standards for reporting
information about operating segments in annual financial statements. The
Company operates in a single industry segment, which is the development and
licensing of its technology.
The Company had the following customers that combined represented in excess
of 31% and 91% of revenues for the years ended December 31, 1997 and 1998,
respectively, and 95% and 83% for the three months ended March 31, 1998 and
1999, respectively (in thousands):
<TABLE>
<CAPTION>
Three months
Years ended ended March
December 31, 31,
------------ -------------
Customer 1997 1998 1998 1999
-------- ---- ------- ------ ------
<S> <C> <C> <C> <C>
1............................................. $639 $25,624 $2,836 $8,041
2............................................. $632 -- $2,837 --
3............................................. -- $ 1,900 -- --
4............................................. $809 $ 151 $ 138 --
5............................................. -- -- -- $1,144
</TABLE>
The Company sells and licenses its technology to customers primarily in
North America, Asia-Pacific and Europe. The loss for all periods presented is
derived primarily from the Company's North American operations, which generates
revenues from the following geographic regions (in thousands):
<TABLE>
<CAPTION>
Years ended December Three months
31, ended March 31,
---------------------- ---------------
1996 1997 1998 1998 1999
------ ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
North America........................ $1,958 $4,278 $ 23,660 $ 2,444 $ 8,198
Asia-Pacific......................... 1,209 932 853 183 368
Europe............................... 521 1,117 5,775 516 2,186
Australia and New Zealand............ 507 494 -- -- 60
------ ------ -------- ------- -------
$4,195 $6,821 $ 30,288 $ 3,143 $10,812
====== ====== ======== ======= =======
</TABLE>
(19) Subsequent Events
(a) Options Granted
In February 1999, the Company granted 144,688 options, with an exercise
price of $2.52 per share. The Company has recorded $503,514 of deferred stock
compensation in connection with these options that will be amortized over the
option vesting period.
(b) Stock Incentive Plan (unaudited)
In April 1999, the Company, with the approval of the board of directors,
adopted the 1999 Stock Incentive Plan (1999 Plan) as a successor to the 1995
Plan. The 1999 Plan has reserved, subject to shareholder approval, 15% of the
outstanding common stock after the IPO, less 500,000 shares. The 1999 Plan has
three separate programs which include; the discretionary option grant program
under which employees may be granted options to purchase shares of common
stock; the stock issuance program under which eligible employees may be granted
shares of common stock; and the automatic grant program whereby eligible non-
employee board members are granted options to purchase shares of common stock.
F-24
<PAGE>
DIVICORE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(c) Employee Stock Purchase Plan (unaudited)
In April 1999, the Company, with the approval of the board of directors,
adopted an Employee Stock Purchase Plan (the Purchase Plan) and reserved
500,000 shares of common stock for issuance thereunder. The Purchase Plan
permits eligible employees to acquire shares of the Company's common stock
through periodic payroll deductions of up to 15% of total compensation. Each
offering period will have a maximum duration of 24 months. The price at which
the common stock may be purchased is 85% of the lesser of the fair market value
of the Company's common stock on the first day of the applicable offering
period or on the last day of the respective purchase period. The initial
offering period will commence on the effectiveness of the IPO and will end on
the last business day of July 2001.
(d) Sale of Preferred Stock and License of Technology (unaudited)
In April 1999 Divicore completed a financing in which it issued convertible
securities to Intel of $4.7 million and entered into a license agreement
covering certain Intel technology.
(e) Initial Public Offering and Reincorporation (unaudited)
In April 1999, the board of directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed IPO.
In addition the board of directors authorized the Company to file Amended
and Restated Articles of Incorporation causing the Company to reincorporate as
a Delaware Corporation. The Amended and Restated Articles of Incorporation are
to be effective upon shareholder approval which is anticipated to occur
immediately prior to the effective date of the IPO. Upon the reincorporation,
the Company will be authorized to issue 30,000,000 shares of $.001 par value
common stock and 5,000,000 shares of $.001 par value undesignated preferred
stock. In connection therewith, the Company authorized a 1 for 6 reverse stock
split which will become effective at the date of the IPO. All shares and per
share amounts in the consolidated financial statements have been restated to
reflect the reverse stock split.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Viona Development Hard & Software Engineering GmbH:
We have audited the accompanying balance sheet of Viona Development Hard &
Software Engineering GmbH (the Company) as of December 31, 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Viona Development Hard &
Software Engineering GmbH as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with United
States generally accepted accounting principles.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
April 6, 1999
F-26
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
BALANCE SHEET
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1997
----
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $248
Accounts receivable..................................................... 147
Prepaid expenses........................................................ 15
----
Total current assets.................................................. 410
----
Furniture and equipment, net.............................................. 199
Other assets.............................................................. 16
----
Total assets.......................................................... $625
====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $153
Accrued expenses........................................................ 17
Loans payable--officers................................................. 69
Income taxes payable.................................................... 186
----
Total current liabilities............................................. 425
----
Deferred income taxes..................................................... 16
----
Total liabilities..................................................... 441
----
Stockholders' equity:
Capital stock........................................................... 36
Accumulated other comprehensive loss.................................... (36)
Retained earnings....................................................... 184
----
Total stockholders' equity............................................ 184
----
Total liabilities and stockholders' equity............................ $625
====
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENT OF OPERATIONS
Year ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1997
------
<S> <C>
Revenues:
Development services................................................. $1,001
Net product sales.................................................... 32
------
Total revenues..................................................... 1,033
------
Research and development............................................... 619
Sales and marketing.................................................... 36
General and administrative............................................. 209
------
Operating income....................................................... 169
Other income (expense):
Interest income...................................................... 4
Interest expense..................................................... (2)
Other income......................................................... 24
------
Income before taxes.................................................... 195
Income tax expense..................................................... 80
------
Net income............................................................. $ 115
======
</TABLE>
F-28
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive loss
------------------
Cumulative Total
Capital translation Retained stockholders'
stock adjustment earnings equity
------- ------------------ -------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1997....................... $ 35 (4) 173 204
Dividends................... -- -- (104) (104)
Net income.................. -- -- 115 115
Other comprehensive loss.... -- (32) -- (32)
-----
Total comprehensive
income................... 83
Capital increase............ 1 -- -- 1
---- ---- ----- -----
Balance as of December 31,
1997....................... $ 36 (36) 184 184
==== ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENT OF CASH FLOWS
Year ended December 31,1997
(In thousands)
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Cash flows from operating activities:
Net income............................................................ $ 115
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation........................................................ 103
Gains on sales of furniture and equipment........................... (9)
Deferred income taxes............................................... (41)
Changes in items affecting operations:
Accounts receivable............................................... 90
Prepaid expenses.................................................. (2)
Accounts payable.................................................. (11)
Accrued expenses.................................................. (42)
Income taxes payable.............................................. 112
-----
Net cash provided by operating activities............................... 315
-----
Cash flows from investing activities:
Payments for furniture and equipment.................................. (185)
Proceeds from sales of furniture and equipment........................ 15
-----
Net cash used in investing activities................................... (170)
-----
Cash flows from financing activities:
Net repayments on bank line of credit................................. (13)
Borrowings under other debt........................................... 72
Proceeds from increase in capital stock............................... 1
Dividends paid........................................................ (104)
-----
Net cash provided by financing activities............................... (44)
-----
Effect of exchange rate changes on cash and cash equivalents............ (33)
-----
Net increase in cash and cash equivalents............................... 68
Cash and cash equivalents at beginning of year.......................... 180
-----
Cash and cash equivalents at end of year................................ $ 248
=====
Supplemental disclosures of cash flow information:
Cash paid for interest................................................ $ --
Cash paid for income taxes............................................ 9
=====
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Operations
Viona Development Hard & Software Engineering GmbH (the Company) is a
limited liability company, organized under the laws of the Federal Republic of
Germany. The Company conducts research and development in the field of
convergence subsystem products and desktop digital video products for use
primarily in desktop personal computers or other electronic devices.
(2) Summary of Significant Accounting Policies
(a) Foreign Currency Translation
The functional currency of the Company is the German mark and the reporting
currency is the U.S. dollar. Functional currency assets and liabilities are
translated into U.S. dollars using the period-end exchange rate while revenues
and expenses are translated using average exchange rates during the year.
Adjustments resulting from the translation of function currency assets and
liabilities into U.S. dollars are recorded as a separate component of
stockholders' equity.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate fair
value due to the short maturity of those instruments.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(e) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line or declining balance method based on the estimated useful
lives of the various classes of furniture and equipment as follows:
<TABLE>
<S> <C>
Software......................................................... 3 years
Computer equipment............................................... 3 years
Research and development equipment............................... 3 years
Furniture and fixtures........................................... 5 years
</TABLE>
(f) Long-Lived Assets
The Company reviews long-lived assets to be held and used by an entity for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-31
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Revenue Recognition
Revenue is recognized upon shipment of products to customers. Revenue
related to development contracts is recognized using the percentage-of-
completion method, based on performance milestones specified in the contract
where such milestones fairly reflect progress toward contract completion.
Revenue related to the Agreement with Divicore Inc. (formerly Quadrant
International Inc.) (see Note 9) is recognized using a cost-plus methodology,
whereby expenses incurred plus a fixed premium are invoiced monthly.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(3) Furniture and Equipment
At December 31, 1997, furniture and equipment consisted of the following (in
thousands)
<TABLE>
<S> <C>
Software............................................................ $ 11
Computer equipment.................................................. 118
Research and development equipment.................................. 77
Furniture and fixtures.............................................. 157
-----
363
Less accumulated depreciation....................................... (164)
-----
$ 199
=====
</TABLE>
Depreciation expense was approximately $103,000 for the year ended December
31, 1997.
(4) Commitments under Operating Leases
The Company leases its office facilities and certain equipment under
operating leases. Rent expense amounted to approximately $37,000 for the year
ended December 31, 1997. Future minimum lease payments under existing
noncancelable operating leases are as follows at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
1998................................................................. $30
1999................................................................. 29
2000................................................................. 29
---
$88
===
</TABLE>
F-32
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Credit and Business Concentration
The Company performs ongoing credit evaluations of its customers financial
condition, and generally no collateral is required.
The Company had one customer representing approximately 70% of accounts
receivable at December 31, 1997.
The Company had one customer which represented approximately 94% of
revenues for the year ended December 31, 1997.
(6) Income Taxes
Income tax expense for the year ended December 31, 1997 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes...................................................... $121
Deferred taxes..................................................... (41)
----
$ 80
====
</TABLE>
German tax law applies a split-rate imputation with regard to the taxation
of the income of a company and its stockholders. In accordance with the tax
law in effect for fiscal 1997, retained income is initially subject to a
federal tax of 45% plus a solidarity surcharge of 7.5% on federal taxes
payable. Including the impact of the surcharge, the federal tax rate amounts
to 48.375%. Upon distribution of retained earnings to stockholders, the income
tax rate on the earnings is adjusted to 30%, plus a solidarity surcharge of
7.5% on the distribution tax, for a total of 32.25%, by means of a refund for
taxes previously paid. Upon distribution of retained earnings in the form of a
dividend, stockholders who are taxpayers in Germany are entitled to a tax
credit in the amount of federal income taxes previously paid by the company.
For German companies, the deferred taxes for 1997 are calculated using an
effective income tax rate of 47.475% plus the after federal tax benefit rate
for trade tax of 8.525%.
A reconciliation of income taxes determined using the German tax rate of
47.475% plus the after federal tax benefit rate for trade taxes of 8.525% for
a combined statutory rate of 56% in 1997 is as follow:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Expected tax expense............................................... $109
Credit for dividend distributions.................................. (31)
Other.............................................................. 2
----
Actual tax expense............................................... $ 80
====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred tax assets--accrued expenses............................. $ 7
Deferred tax liabilities--furniture and equipment, principally due
to differences in depreciation................................... 23
---
Net deferred tax liabilities.................................... $16
===
</TABLE>
F-33
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible.
(7) Development Agreement
On February 6, 1997, the Company entered into an exclusive development
agreement (the Agreement) with Divicore Inc. (Divicore), whereby the Company
agreed to exclusively develop personal computer-convergence products for
Divicore. Under the Agreement, the Company will receive fees from Divicore
monthly based on the greater of product engineering costs incurred plus a
premium or $80,000.
(8) Related-party Transactions
In 1997, each of the Company's three owners granted a loan to the Company
for approximately $22,000 (DM 40,000). The loans bear interest at 7% per year
and are payable on demand. At December 31, 1997, each of these loans plus
accrued interest amounted to approximately $23,000. The statement of operations
for the year ended December 31, 1997 includes approximately $2,400 of interest
expense related to these loans. The Company believes the interest expense
incurred was equivalent to the amounts that would be paid under arm's-length
transactions.
(9) Subsequent Events
In January 1998, the Company's stockholders agreed to sell the Company to
Divicore. In April 1998 the acquisition was completed and was accounted for as
a purchase business combination. The purchase consideration consisted of
1,204,820 shares of Divicore common stock and $6.1 million in cash.
F-34
<PAGE>
DIVICORE INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is filed herewith:
unaudited combined pro forma statement of operations for the year ended
December 31, 1998.
In April 1998 the Company completed the acquisition of Viona Development
Hard & Software Engineering GmbH (Viona) a company located in Germany
specializing in the development of digital video technology. The purchase price
included $6.1 million in cash, 1,204,820 shares of the Company's common stock
valued at $4.8 million and incurred transaction costs of $0.8 million. The
acquisition of Viona was recorded under the purchase method of accounting.
A portion of the purchase price was allocated to in-process research and
development technology, which resulted in a charge of $7.9 million to the
Company's operations in April 1998. The excess of the purchase price over the
fair value of the net identifiable assets and in-process research and
development technology acquired of $3.5 million has been recorded as goodwill
and is amortized on a straight-line basis over four years.
The unaudited combined pro forma statement of operations reflects the
acquisition of Viona as if it occurred on January 1, 1998. Since the pro forma
financial statement which follows is based upon the operating results of Viona
during a period when it was not under the control or management of the Company
the information presented may not be indicative of the results which would have
actually been obtained had the acquisition been completed as of January 1, 1998
nor are they indicative of future financial or operating results. The unaudited
pro forma financial information does not give effect to any synergies that may
occur due to the integration the Company and Viona. The condensed combined pro
forma financial statement should be read in conjunction with the historical
audited financial statements of the Company and the notes thereto, as well as
the audited historical financial statements of Viona and the notes thereto
included elsewhere in this prospectus.
F-35
<PAGE>
DIVICORE INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Divicore Inc.(1) Viona(2) Adjustments Combined
---------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues: $ 30,288 $253 $(253)(a) $ 30,288
Cost of revenues......... 24,546 -- -- 24,546
---------- ---- ----- ----------
Gross profit........... 5,742 253 (253) 5,742
Research and development... 3,121 169 (253)(a) 3,037
Sales and marketing........ 1,964 31 -- 1,995
General and
administrative............ 4,673 37 -- 4,710
Depreciation and
amortization.............. 906 -- 222 (b) 1,128
Compensation related to
stock options............. 139 -- -- 139
Acquired in-process
research and development.. 7,900 -- -- 7,900
---------- ---- ----- ----------
Operating income (loss).... (12,961) 16 (222) (13,167)
---------- ---- ----- ----------
Interest (income) expense
and other, net............ 722 (11) -- 711
---------- ---- ----- ----------
Net income (loss).......... (13,683) 27 (222) (13,878)
---------- ---- ----- ----------
Accretion of mandatory
redeemable preferred
stock..................... 754 -- -- 754
---------- ---- ----- ----------
Loss attributable to common
stockholders.............. $ (14,437) $ 27 $(222) $ (14,632)
========== ==== ===== ==========
Pro forma net loss per
common share:
Basic and diluted........ $ (4.94) (c) $ (4.41)
========== ==========
Weighted average shares
outstanding............. 2,920,677 3,316,782
========== ==========
</TABLE>
- ----------
(1) Actual for the year ended December 31, 1998
(2) Actual for the three months ended March 31, 1998
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-36
<PAGE>
DIVICORE INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited pro forma combined statements of operations for
the year ended December 31, 1998 give effect to the acquisition of Viona as if
it had occurred on January 1, 1998.
The effects of the acquisition have been presented using the purchase method
of accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best estimate of their
fair value.
The pro forma adjustments related to the purchase price allocation of the
acquisition represent management's best estimate of the effects of the
acquisition.
2. The pro forma statement of operations adjustments for the year ended
December 31, 1998 consist of:
(a) Pro forma revenue and research and development expense has been adjusted
to reflect the elimination of the amounts paid by Divicore Inc. to Viona for
development services.
(b) Pro forma general and administrative expense has been adjusted to
reflect the amortization of goodwill and other intangible assets associated
with the acquisition which has an estimated useful life of four years. ($3.5
million divided by 48 months = $0.07 million per month; $0.2 million
amortization per quarter).
(c) Basic and diluted weighted average common shares outstanding and net
loss per share amounts have been adjusted to reflect the issuance of the
1,204,820 shares of the Company's common stock in connection with the
acquisition, as if the shares had been outstanding from January 1, 1998.
(d) No income tax provision is required due to the Company's current tax
loss and the inability of the Company to currently use the benefits of the net
operating loss carryforward.
F-37
<PAGE>
(Inside Back Cover)
On the top of the page on the left three quarters of the page is the
Divicore logo, which appears on a shaded background and consists of the word
"DIVICORE(TM)," with the first four letters being shaded and the fifth and
sixth letters being encircled by a diagonal ring. Underneath the logo are the
words "What the digital world watches."
Below the logo centered on the page on a shaded background are three
concentric circles which overlap. The left circle contains the words "Consumer
Electronics" in large print. Below, in smaller print, are the words "Hardware
Vendors," "Component Vendors," and "Retailers." Off to the left side of this
circle is a white oval inside of which are the words "Hardware Design
Royalties" and "Software Licensing Revenue." The right circle contains the
words "Computers" in large print. Below, in smaller print, are the words "PC
OEMs," "Component Vendors," "Software Developers" and "End Users." Off to the
right side of this circle is a white oval inside of which are the words
"Hardware Sales," "Software Licensing Revenue" and "Hardware Design Royalties."
The middle circle is shaded and contains the word "DIVICORE(TM)" in large print
and below in smaller print, the words "Digital Video & Audio Technologies."
Below these circles, in bold, are the words "Applying a suite of technologies
to a variety of digital video & audio sources to create high performance
consumer electronics and PC products."
On the bottom the page is a line extending across the page, above which
appears the words "Our Customers" and below which appears the logos of the
following nine companies: Compaq, Sanyo, Packard Bell NEC, Hewlett-Packard,
Yamaha, Micron Electronics, Dell Gateway (below which is the tag line "Connect
with us") and Fujitsu.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any in-
formation or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any shares in any jurisdiction in which it is unlawful. The information in
this prospectus is current as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Corporate Information.................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 27
Selected Consolidated Financial Data..................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 42
Management............................................................... 53
Certain Transactions..................................................... 65
Principal Stockholders................................................... 68
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 73
Underwriting............................................................. 75
Legal Matters............................................................ 77
Experts.................................................................. 77
Additional Information................................................... 77
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Until , 1999 (25 days after the date of this Prospectus), all dealers
effecting transactions in the common stock offered hereby, whether or not par-
ticipating in this distribution, may be required to deliver a Prospectus. This
is in addition to the obligations of dealers to deliver a Prospectus when act-
ing as Underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Divicore Inc.
Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
-------------
SG Cowen
Volpe Brown Whelan & Company
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Divicore in connection with
the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee................................................ 16,680
NASD Filing Fee..................................................... 6,500
Nasdaq National Market Listing Fee.................................. *
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Transfer Agent Fees................................................. *
Miscellaneous....................................................... *
Total........................................................... *
</TABLE>
- --------
*To be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Divicore's Bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Divicore's
Certificate of Incorporation provides that, subject to Delaware law, its
directors shall not be personally liable for monetary damages for breach of
the directors' fiduciary duty as directors to Divicore and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to Divicore or its
stockholders for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. Divicore has entered into indemnification agreements with its officers
and directors, a form of which was previously filed with the Securities and
Exchange Commission (the "Commission") as an Exhibit to the Registrant's
Registration Statement on Form S-1 (No. 333- ) (the
"Indemnification Agreements"). The Indemnification Agreements provide
Divicore's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law. Reference is also
made to Section of the Underwriting Agreement contained in Exhibit 1.1
hereto, indemnifying officers and directors of Divicore against certain
liabilities, and Section 1.10 of the Registration Rights Agreement contained
in Exhibit 4.2 hereto, indemnifying certain of Divicore's stockholders,
including controlling stockholders, against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) During 1996, the Registrant issued and sold 96,529 shares of its
common stock to employees and consultants for an aggregate purchase price
of $103,750 pursuant to direct stock issuances.
II-1
<PAGE>
(b) In February 1996, the Registrant issued and sold 44,080 shares of its
common stock to an employee for an aggregate purchase price of $30,000.
(c) In March 1996, the Registrant issued and sold 7,347 shares of its
common stock to an employee of the Registrant for an aggregate purchase
price of $5,000.
(d) In March and April 1996, the Registrant issued and sold an aggregate
of 31,373 shares of its common stock for an aggregate purchase price of
$18,750 to an employee of the Registrant.
(e) In March 1996, the Registrant issued to NEPA Venture Fund II, L.P. a
subordinated note in the principal amount of $125,000 and warrants to
purchase up to 83,635 shares of Class A Preferred Stock at an exercise
price of $0.7473 per share (subject to adjustment).
(f) In June 1996, the Registrant issued warrants to purchase up to 20,982
shares of its common stock at an exercise price of $0.7473 per share to a
bank.
(g) In August 1996, the Registrant issued and sold an aggregate of
194,999 shares of its common stock to several investors for an aggregate
purchase price of $1,050,000.
(h) In November 1996, the Registrant issued and sold 166,667 shares of
its common stock to an investor for an aggregate purchase price of
$1,000,000.
(i) In March 1997, the Registrant issued and sold 83,333 shares of its
Common Stock to an investor for an aggregate purchase price of $500,000.
(j) In April 1997, the Registrant issued to a lender a warrant to
purchase up to 12,500 shares of its common stock at an exercise price of
$3.558 per share.
(k) In August 1997, the Registrant issued and sold 5,000 shares of its
common stock to an investor for an aggregate purchase price of $45,000.
(l) In September 1997, the Registrant issued to a lender a warrant to
purchase up to 33,333 shares of its common stock at an exercise price of
$3.558 per share.
(m) In October 1997, the Registrant issued and sold to an investor 25,000
shares of its common stock for an aggregate purchase price of $165,000.
(n) In December 1997, the Registrant issued to an investor a subordinated
debenture in a principal amount of $1,500,000 convertible into shares of
Class B Preferred Stock or common stock and warrants to purchase up to
45,000 shares of its common stock at an exercise price of $3.18 per share.
(o) In January 1998, the Registrant entered into an agreement to acquire
Viona Development Hard & Software Engineering GmbH, or Viona, whereby the
purchase price was payable in cash and in shares of Registrant's common
stock. In April 1998, the Registrant completed the acquisition and paid an
aggregate of $2,550,000 and issued an aggregate of 1,204,820 shares of its
common stock to the principals of Viona in accordance with the terms of the
acquisition agreement.
(p) In February 1998, the Registrant issued to an investor a subordinated
debenture in a principal amount of $250,000 which is convertible into
shares of Class B Preferred Stock or common stock and warrants to purchase
up to 7,500 shares of common stock at an exercise price of $4.98 per share.
(q) March 1998, the Registrant issued to several investors subordinated
debentures in an aggregate principal amount of $2,000,000 which is
convertible into shares of Class B Preferred Stock or common stock and
warrants to purchase up to an aggregate of 20,080 shares of common stock at
an exercise price of $4.98 per share.
II-2
<PAGE>
(r) In March 1998, the Registrant issued to an investor a subordinated
debenture in a principal amount of $270,000 which is convertible into
shares of Class B Preferred Stock or common stock and a warrant to purchase
up to 9,759 shares of common stock at an exercise price of $3.18 per share.
(s) In April 1998, the Registrant issued to an investor warrants to
purchase up to 3,333 shares of common stock at an exercise price of $6.00
per share.
(t) In April 1998, the Registrant issued to several investors
subordinated debentures in an aggregate principal amount of $300,000 which
is convertible into shares of Class B Preferred Stock or common stock and
warrants to purchase up to 10,843 shares of common stock at an exercise
price of $4.98.
(u) In April, 1998, the Registrant issued to an investor subordinated
debentures in an aggregate principal amount of $500,000 which is
convertible into 100,402 shares of Class B Preferred Stock or common stock
and warrants to purchase up to 40,864 shares of Common Stock at an exercise
price of $0.06 per share.
(v) In April 1998, the Registrant issued to several investors an
aggregate of 12,962 shares of common stock as interest payments on its
outstanding subordinated debentures.
(w) In April 1998, the Registrant issued an aggregate of 3,628,514 shares
of its Class B Preferred Stock and warrants to purchase an aggregate of
1,476,805 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to several investors for an aggregate purchase
price of $18,070,000.
(x) In April 1998, the Registrant issued an aggregate of 108,856 shares
of its Class B Preferred Stock and warrants to purchase an aggregate of up
to 44,304 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to Lehman Brothers, Inc. as compensation for
services rendered by Lehman Brothers in connection with the Class B
Preferred Stock Financing.
(y) In April 1998, Atlantic Coastal Ventures, L.P. received interest on
its subordinated debentures in the form of common stock and exercised
warrants received with the debentures into 208,862 shares of common stock
for an aggregate purchase price of $182,813. In addition, Atlantic Coastal
Ventures, L.P. converted the debentures into 355,422 shares of Class B
Preferred Stock.
(z) In April 1998, the Registrant issued to Progress Capital, Inc., a
warrant to purchase up to 16,667 shares of its common stock at an exercise
price of $3.558 per share.
(aa) In May 1998, an investor of the Registrant converted the outstanding
$500,000 principal on a subordinated convertible debenture into 100,402
shares of Class B Preferred Stock.
(bb) In July, September and December 1998, the Registrant issued to an
investor an aggregate of 75,301 Shares of Class B Preferred Stock and
warrants to purchase up to 30,648 shares of common stock for an aggregate
purchase price of $375,000.
(cc) In April 1999 (prior to the filing of the Registration Statement for
this offering) the Registrant issued an aggregate of 125,502 shares of
Class B Preferred Stock and warrants to purchase 51,079 shares of common
stock for a promissory note of $500,000 and in exchange for certain royalty
obligations.
(dd) In April 1999 (prior to the filing of the Registration Statement for
this offering) the Registrant issued an aggregate of $3,000,000 of
subordinated convertible promissory notes to an investor, which notes are
convertible into Class C Preferred Stock of the Registrant.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1 Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the Registrant.
2.2 Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the Registrant.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2 Registration Rights Agreement, dated April 30, 1998, by and among the
Registrant and parties listed on Schedule A therein.
4.3 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the Registrant and
Meridian Bank.
4.7 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the Registrant and
Meridian Bank.
4.8 Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the Registrant and NEPA Venture Fund II, L.P.
4.9 Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the Registrant and Atlantic Coastal
Ventures, L.P.
4.10 Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the Registrant and Donald Horton and Marty
Horton, as community property.
4.11 Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the Registrant
and the parties who are signatories thereto.
4.12 Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the Registrant and the parties who are signatories
thereto.
4.13 Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the Registrant and NEPA Venture Fund II, L.P.
4.14 Convertible Promissory Note Purchase Agreement, dated as of April 26,
1999, among the Registrant and the parties who are signatories
thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
4.15 Registration Rights Agreement, dated as of April 26, 1999, among the
Registrant and the parties listed on Schedule A thereto.
4.16* Software License Agreement, dated as of April 27, 1999, between the
Registrant and Intel Corporation.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1 Registrant's 1999 Stock Incentive Plan.
10.2 Registrant's 1999 Employee Stock Purchase Plan.
10.3 Form of Directors' and Officers' Indemnification Agreement.
10.4 Letter Agreement, dated October 28, 1997, by and between the
Registrant and Dell Products, L.P.
10.5** License Agreement, dated June 30, 1998, by and between the Registrant
and ST Microelectronics, Inc.
10.6 Source and Object Code License Agreement, dated September 1, 1998, by
and between the Registrant and Microsoft Corporation.
10.7** Development and License Agreement, dated March 2, 1998, by and between
the Registrant and ATI Technologies Inc.
10.8** Sti5505 Development Contract, dated February 1, 1999, by and between
the Registrant and ST Microelectronics, SA.
10.9** Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the Registrant and Dolby
Laboratories Licensing Corporation.
10.10 Agreement of Lease, dated June 5, 1998, by and between the Registrant
and Liberty Property Limited Partnership.
10.11 Form of Software License Agreement.
10.12 Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the Registrant and Silicon Valley Bank.
10.13 Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14 Letter Agreement, dated August 20, 1997, by and between the Registrant
and Francis E.J. Wilde III.
10.15 Employment Agreement, dated November 12, 1997, by and between the
Registrant and Michael Harris.
10.16 Employment Agreement, dated November 12, 1997, by and between the
Registrant and Jason Liu.
10.17 Employment Agreement, dated December 11, 1997, by and between the
Registrant and Leonard Sharp.
10.18 Employment Agreement, dated January 12, 1998, by and between the
Registrant and Robert Russell.
10.19 Employment Agreement, dated December 15, 1997, by and between the
Registrant and Gregg Garnick.
10.20 Amendment to Employment Agreement, dated March 19, 1998, by and
between the Registrant and Gregg Garnick.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-7.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
II-5
<PAGE>
- --------
* To be filed by amendment
** Confidential treatment requested for portions of this agreement
(b) Financial Statement Schedule
<TABLE>
<CAPTION>
Balance Charged
at to Costs Charged Balance
Beginning and to Other at End
of Year Expenses Accounts Deductions(1) of Year
--------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Accounts Receivable--
Allowance for doubtful
accounts
For the year ended December
31, 1996.................. $ 35,000 $120,000 -- $ (16,000) $139,000
For the year ended December
31, 1997.................. 139,000 384,038 -- (56,438) 466,600
For the year ended December
31, 1998.................. 466,600 48,347 -- (250,097) 264,850
Inventory--Reserve for
obsolete inventory
For the year ended December
31, 1996.................. 25,000 75,000 -- -- 100,000
For the year ended December
31, 1997.................. 100,000 300,000 -- -- 400,000
For the year ended December
31, 1998.................. 400,000 70,000 -- (295,565) 174,435
</TABLE>
- --------
(1) Represents write-off of uncollectible accounts receivable and obsolete
inventory.
Item 17. Undertakings
Divicore hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Divicore
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Divicore, Indemnification Agreements entered
into between Divicore and its officers and directors, the Underwriting
Agreement, or otherwise, Divicore has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
Divicore of expenses incurred or paid by a director, officer, or controlling
person of Divicore in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Divicore will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by Divicore pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Malvern, Commonwealth of
Pennsylvania, on this 28th day of April, 1999.
DIVICORE INC.
/s/ Francis E. J. Wilde III
By: _________________________________
Francis E. J. Wilde III
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Francis E. J.
Wilde III and Jason C. Liu, and each one of them, his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Francis E. J. Wilde III Chief Executive Officer, April 28, 1999
____________________________________ President and Director
Francis E. J. Wilde III (Principal Executive
Officer)
/s/ Jason C. Liu Chief Financial Officer, April 28, 1999
____________________________________ Vice President, Finance
Jason C. Liu and Secretary (Principal
Accounting Officer)
/s/ Frederick J. Beste III Director April 28, 1999
____________________________________
Frederick J. Beste III
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Peter X. Blumenwitz Director April 28, 1999
____________________________________
Peter X. Blumenwitz
/s/ Walter L. Threadgill Director April 28, 1999
____________________________________
Walter L. Threadgill
/s/ Paul A. Vais Director April 28, 1999
____________________________________
</TABLE> Paul A. Vais
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1 Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the Registrant.
2.2 Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the Registrant.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2 Registration Rights Agreement, dated April 30, 1998, by and among the
Registrant and parties listed on Schedule A therein.
4.3 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the Registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the Registrant and
Meridian Bank.
4.7 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the Registrant and
Meridian Bank.
4.8 Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the Registrant and NEPA Venture Fund II, L.P.
4.9 Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the Registrant and Atlantic Coastal
Ventures, L.P.
4.10 Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the Registrant and Donald Horton and Marty
Horton, as community property.
4.11 Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the Registrant
and the parties who are signatories thereto.
4.12 Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the Registrant and the parties who are signatories
thereto.
4.13 Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the Registrant and NEPA Venture Fund II, L.P.
4.14 Convertible Promissory Note Purchase Agreement, dated as of April 28,
1999, among the Registrant and the parties who are signatories
thereto.
4.15 Registration Rights Agreement, dated as of April 28, 1999, among the
Registrant and the parties listed on Schedule A thereto.
4.16* Software License Agreement, dated as of April 27, 1999, between the
Registrant and Intel Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1 Registrant's 1999 Stock Incentive Plan.
10.2 Registrant's 1999 Employee Stock Purchase Plan.
10.3 Form of Directors' and Officers' Indemnification Agreement.
10.4 Letter Agreement, dated October 28, 1997, by and between the
Registrant and Dell Products, L.P.
10.5** License Agreement, dated June 30, 1998, by and between the Registrant
and ST Microelectronics, Inc.
10.6 Source and Object Code License Agreement, dated September 1, 1998, by
and between the Registrant and Microsoft Corporation.
10.7** Development and License Agreement, dated March 2, 1998, by and between
the Registrant and ATI Technologies Inc.
10.8** Sti5505 Development Contract, dated February 1, 1999, by and between
the Registrant and ST Microelectronics, SA.
10.9** Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the Registrant and Dolby
Laboratories Licensing Corporation.
10.10 Agreement of Lease, dated June 5, 1998, by and between the Registrant
and Liberty Property Limited Partnership.
10.11 Form of Software License Agreement.
10.12 Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the Registrant and Silicon Valley Bank.
10.13 Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14 Letter Agreement, dated August 20, 1997, by and between the Registrant
and Francis E.J. Wilde III.
10.15 Employment Agreement, dated November 12, 1997, by and between the
Registrant and Michael Harris.
10.16 Employment Agreement, dated November 12, 1997, by and between the
Registrant and Jason Liu.
10.17 Employment Agreement, dated December 11, 1997, by and between the
Registrant and Leonard Sharp.
10.18 Employment Agreement, dated January 12, 1998, by and between the
Registrant and Robert Russell.
10.19 Employment Agreement, dated December 15, 1997, by and between the
Registrant and Gregg Garnick.
10.20 Amendment to Employment Agreement, dated March 19, 1998, by and
between the Registrant and Gregg Garnick.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-7.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
- ----------
* To be filed by amendment
** Confidential treatment requested for portions of this agreement
<PAGE>
EXHIBIT 2.1
SALES AGREEMENT
---------------
CONCERNING SHARES
-----------------
between
Herrn Ulrich Sigmund, Viktoriastra(ss)e 6, 76133 Karlsruhe
Herrn Hendrik Horak, Schulze Delitzsch Stra(ss)e, 5, 65510 Idstein
Herrn Jorg Ringelberg, Viktoriastra(ss)e 6, 76133 Karlsruhe
- hereinafter referred to as "SELLERS" --and
Erste CINCO Vermogensverwaltungs GmbH
represtnted by
managing director
Jason Liu
- hereinafter referred to as "BUYER" --and
Quadrant International Inc.
269 Great Valley Parkway
Malvern, PA 19355 USA
represented by
Frank Wilde
- hereinafter referred to as QUADRANT -
Preamble
--------
The Sellers hold 100% of the shares of VIONA Development Hard & Software
Engineering GmbH (hereafter referred to as VIONA), with its seat in Karlsruhe,
registered in the Commercial Register under the number HRB 7305.
QUADRANT holds 100% of the shares of Erste CINCO Vermogensverwaltungs GmbH
(hereafter referred to as CINCO) with its seat in Frankfurt am Main, registered
in the Commercial Register under the number HRB 42478.
Now, therefore, in consideration of the premises, the contractual parties have
entered into this agreement:
<PAGE>
1. The Company and its shareholders:
- ------------------------------------
The SELLERS hold 100% of the fully paid shares of VIONA Development Hard &
Software Engineering GmbH with a fully paid share capital of DM 52,500.00, of
which eash SELLER holds DM 17,500.00.
2. Sale of Shares
- ------------------
2.1 Hereby, the SELLERS sell the above-mentioned shares of company to the
BUYER.
2.2 The sale shall become effective as of January 16, 1998.
From that date on only the BUYER shall be entitled to all rights and bear
all obligations arising from the shares, including voting rights.
2.3 The Parties agree that they will put each other economically into a
position as if the assignment of the shares had already become effective as
of December 31, 1997, midnight. SELLERS have the rights to the 1997
profits.
3. Consideration for Sale
- --------------------------
The BUYER will pay to the SELLERS the purchase price for the shares in US $ as
set forth on Schedule A hereto which is a condition of this contract.
4. Financial statements
- ------------------------
The financial statements of the company (including balance, profit- and loss
statement) for the fiscal year ending 12-31-1996 has been delivered to the BUYER
before signing of the contract.
5. Representation and Warranties
- ---------------------------------
The SELLERS hereby make the following representations and warranties:
5.1 The financial statements as of 12-31-1996 (Schedule B) represents fairly
the financial condition, assets, earnings, liabilities, equity and
liability of the company, they are correct and complete, and have been
prepared in accordance with the "Grundsatze ordnungsma(ss)iger Buchfuhrung"
(German general accepted accounting principles) and in compliance with the
relevant statutory provisions.
5.2 All contributions due on the shares mentioned in Section 1 of this
agreement have been fully paid, according to the regulations and without
being in violation of the prohibition against hidden contributions in kind.
5.3. None of the shares in the company are subject to any limitations of
disposal or to any rights of third parties.
2
<PAGE>
5.4 The transfer of the shares in the company does not constitute an asset
transfer within the meaning of Section 419 BGB or Section 1365 BGB and
there do not exist any liabilities for which the BUYER could be held liable
under Section 419 BGB or Section 1365 BGB.
5.5 There is no litigation or administrative procedure or proceeding at an
arbitrage body or court (including any bankruptcy or composition any
proceeding SELLERS' against the company and none is pending and, to the
SELLERS' knowledge, none is threatened.
5.6 With regard to their business activities, the company has complied with all
relevant laws.
5.7 No bankruptcy or composition proceedings concerning the assets of the
SELLERS or the company have been applied for and no circumstance exist,
including the insolvency or inability to pay its debts as they become due
pursuant to Bankruptcy Code or Law Relating to the Avoidance of Debtor's
Legal Translations which could in any way jeopardize the effective of the
transfer of shares.
5.8 The SELLERS do not make any further warranties regarding the legal or
economic condition of VIONA Development Hard & Software Engineering GmbH
especially none for the continuance of the present worth and profitability
of the company.
5.9 The facts stated in this agreement and in the Schedules are accurate and
complete.
6. Liability of the SELLER
- ---------------------------
6.1 With respect to any violation of the representation and warranties set
forth in Section 5 and of any other obligations hereunder, the SELLERS
shall place the BUYER in such a position as if any such representation or
warranty were fulfilled. The BUYER can ask to receive the compensation in
cash. Section 377 HGB (German Commercial Code) shall not apply.
6.2 All claims of the BUYER under this Agreement with the exception of claims
of the BUYER against the SELLERS with respect to tax liabilities or demands
according to Section 419 BGB and claims of third parties on the shares
shall be subject to statute of limitation within three (3) years of the
sale date.
6.3 Rights of the BUYER against the SELLERS with respect of tax liabilities
shall be subject to statute of limitation within 6 months after the date of
the final non-appealable assessment of each particular tax liability, which
may arise as a result of an audit by the tax authorities and any potential
subsequent litigation.
6.4 Claims with respect to demands against the BUYER according to Section 419
BGB and for reason of rights of third parties on the shares shall be
subject to statute of limitation within 6 months after the demand against
the BUYER has been realized.
3
<PAGE>
6a Limitations of Dismissal and Transfer
- -----------------------------------------
6a.1 BUYER agrees not to dismiss any of SELLERS' managing directors of VIONA
Development Hard & Software Engineering GmbH prior to April 30, 1998. The
right to dismissal on important grounds shall remain.
6a.2 Any sale, transfer, or pledging as collateral any shares of VIONA
Development Hard & Software Engineering GmbH prior to April 30, 1998 shall
only be effective upon the prior approval of VIONA Development Hard &
Software Engineering GmbH.
7. Confidentiality
- --------------------
7.1 The SELLERS and the BUYER agree to treat any information and documents
exchanged within the scope of this agreement strictly confidential. Any
disclosure thereof to third parties shall require the prior written
approval of the other parties.
7.2 The SELLER and the BUYER may use the information obtained within the scope
of this Agreement and its consummation only for the purpose of consummation
hereof.
8. Cumulative assumption of debts
- -----------------------------------
QUADRANT is joining this agreement as joint and several debtor for the purchase-
money claim.
9. Cancellation of the Agreement and Obligation to re-assign
- -------------------------------------------------------------
9.1 This Agreement may be terminated jointly by the SELLERS in case the BUYER
does not pay the purchase price within the time and performance specified
in Schedule A.
9.2 This Agreement may be terminated by either the SELLERS or QUADRANT and
CINCO if the parties do not agree to an appendix of this agreement
concerning further mutual representations and warranties April 15, 1998 at
the latest. This appendix will be a part of this Agreement.
9.3 This Agreement may be terminated by QUADRANT and CINCO if QUADRANT has not
increased its equity capital by at least US $15,000,000 by March 31, 1999.
9.4 In case the appendix mentioned in section 9.2 will not be signed within the
specified time QUADRANT and CINCO authorize the SELLERS to re-assign the
share-deal agreed to and recorded January 16, 1998 (see Schedule C).
9.5 In the event of any termination of this Agreement, none of the parties to
this Agreement will have any liability to the others except for any willful
breach of any of the provisions of this Agreement.
4
<PAGE>
10. Costs and other Miscellaneous Provisions
- ---------------------------------------------
10.1 The BUYER shall pay all costs of legal, tax and other advice of both
parties. The costs of the notary public shall be borne by the BUYER.
10.2 Amendments to and/or supplements of this Agreement and its Schedules shall
be provided in writing. The same applies to a waiver of this written
form clause.
10.3 If a provision of this Agreement or its modifications and amendments should
be or become legally invalid or unenforceable, the validity of the
remainder of this Agreement shall not be affected hereby. In such case the
contracting parties will replace the invalid provision by a provision which
is legally valid and comes closest to achieving the economic purpose of the
invalid provision. The same applies to any omission in the terms of this
Agreement.
10.4 This Agreement shall be governed by and construed in accordance with the
laws of Germany. Exclusive place of jurisdiction shall be Karlsruhe.
10.5 This Agreement exists in both a German and an English version. For the
purpose of interpreting this Agreement, the German version takes sole
precedence.
Frankfurt, 16. Jan 98
---------------------
(place and date)
/s/ Jorg Ringelberg /s/ Jason Liu
- ---------------------------- ---------------------
(SELLER) (BUYER)
/s/ Hendrick Horak
- ----------------------------
(SELLER)
/s/ Ulrich Sigmund
- ----------------------------
(SELLER)
/s/ Francis E. Wilde
- ----------------------------
(QUADRANT)
The original version of this Sales Agreement Concerning Shares, dated January
16, 1998, by and among Ulrich Sigmund, Hendrick Horak, Jorg Ringelberg, Erste
Cinco Vermogensverwalfungs and the Registrant was in German. I certify that the
foregoing is a fair and accurate English translation of the German version.
____________________________
Jason Liu
Secretary
5
<PAGE>
EXHIBIT 2.2
APPENDIX TO
SALES AGREEMENT CONCERNING SHARES
Dated January 16, 1998, as amended
BETWEEN
ULRICH SIGMUND, HENDRIK HORAK AND JORG RINGELBERG
as the Seller
AND
ERSTE CINCO VERMOGENSVERWALTUNGS GMBH
as the Buyer
AND
QUADRANT INTERNATIONAL, INC.,
as QUADRANT
DATED: AS OF JANUARY 16, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Consideration and Delivery......................................... 3
1.1 Payment of Consideration........................................... 3
1.2 Initial Payment Closing Date Deliveries............................ 3
Section 2. Representations and Warranties of the Shareholders................. 3
2.1 VIONA.............................................................. 4
2.2 Subsidiaries, Partnerships, Joint Ventures......................... 4
2.3 Authority Relative to Sales Agreement and Appendix................. 4
2.4 Capitalization..................................................... 5
2.5 Officers and Directors............................................. 5
2.6 Financial Statements............................................... 5
2.7 Borrowings and Guarantees.......................................... 5
2.8 Real Property...................................................... 6
2.9 Personal Property.................................................. 6
2.10 Leaseholds......................................................... 6
2.11 Insurance.......................................................... 6
2.12 Intellectual Property.............................................. 6
2.13 Labor Matters...................................................... 7
2.14 Employee Benefits.................................................. 7
2.15 Material Contracts................................................. 7
2.16 Compliance with Laws............................................... 8
2.17 Tax Matters........................................................ 8
2.18 Conduct of Business................................................ 9
2.19 Bank Accounts...................................................... 10
2.20 Powers of Attorney................................................. 10
2.21 Books of Account; Returns and Reports.............................. 10
2.22 Raw Materials...................................................... 10
2.23 Diligence Investigation............................................ 10
Section 3. Representations of QUADRANT and CINCO.............................. 11
3.1 Organization and Qualification..................................... 12
3.2 QUADRANT Stock to be Delivered..................................... 12
3.3 Financial Statements............................................... 12
Section 4. Additional Agreements of the Parties............................... 12
4.1 Consents........................................................... 12
4.2 Maintain Subject Business as a Going Concern....................... 12
4.3 Consent to Jurisdiction in Connection with Appendix................ 13
4.4 Stock Options and Capital Contributions............................ 14
4.5 Exchange Rate Guarantee............................................ 14
Section 5. Right to Investigate............................................... 14
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 6. Conditions to the Obligations of All Parties....................... 14
Section 7. Conditions to the Obligations of QUADRANT and CINCO................ 15
7.1 Representations and Warranties..................................... 15
7.2 Absence of Changes................................................. 15
7.3 Consents........................................................... 15
7.4 Approval of Legal Matters by Dunnington, Bartholow & Miller LLP.... 16
7.5 Legality; Litigation Affecting Initial Payment Closing............. 16
7.6 Employment Agreements.............................................. 16
Section 8. Conditions to the Obligations of the Shareholders.................. 16
8.1 Corporate Authorization............................................ 16
8.2 Representations and Warranties..................................... 16
8.3 Consents........................................................... 17
8.4 Approval of Legal Matters by Counsel to the Shareholders and VIONA. 17
8.5 Legality; Litigation Affecting Initial Payment Closing............. 17
Section 9. Indemnification.................................................... 17
9.1 Indemnification by the Parties..................................... 17
Section 10. Certain Covenants of the Parties................................... 18
10.1 Separate Existence of VIONA........................................ 18
10.2 Location of VIONA Entity Office.................................... 18
10.3 Shareholders' Right to Co-Own the Intellectual Property............ 18
10.4 Full Time Effort by the Shareholders............................... 18
Section 11. Termination, Amendment and Waiver.................................. 19
11.1 Termination........................................................ 19
11.2 Effect of Termination.............................................. 19
11.3 Amendment.......................................................... 19
11.4 Extension; Waiver.................................................. 19
11.5 Prior Agreement.................................................... 19
Section 12. Broker's and Finder's Fees......................................... 19
Section 13. No Public Announcement............................................. 20
Section 14. Notices............................................................ 20
Section 15. Interpretation..................................................... 20
Section 16. Cooperation........................................................ 21
Section 17. Waiver, Discharge, Etc............................................. 21
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 18. Non-Competition.................................................... 21
Section 19. Miscellaneous...................................................... 22
</TABLE>
ANNEXES and EXHIBITS to APPENDIX
--------------------------------
DATED JANUARY 16, 1998
----------------------
ANNEXES
- -------
A Required Consents and Approvals
B List of Directors, Officers and Employees of VIONA
C List of Borrowings and Guarantees
D List of all Leases of Real Property and Personal Property
E Description of Insurance Coverage
F Intellectual Property
G List of all Material Contracts, etc.
H Bank Accounts
EXHIBITS
- --------
1. Form of Investment Representation Letter
2. Form of Shareholders' Employment Agreement
3. Form of Joinder to Shareholders Agreement
4. Form of Stock Option Agreement
iii
<PAGE>
APPENDIX TO SALES AGREEMENT
DATED AS OF JANUARY 16, 1998
THIS APPENDIX TO SALES AGREEMENT made and entered into as of January
16, 1998 (to be effective as of December 31, 1997) (the "Appendix"), between
QUADRANT INTERNATIONAL, INC., a corporation organized under the laws of the
Commonwealth of Pennsylvania ("QUADRANT"), ERSTE CINCO VERMOGENSVERWALTUNGS
GmbH, a GmbH organized under the laws of the Federal Republic of Germany and a
wholly-owned subsidiary of QUADRANT ("CINCO"), and Hendrik Horak, Jorg
Ringelberg and Ulrich Sigmund, being the holders of all of the share capital
(the "Shareholders" ) of VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH, a
GmbH organized under the laws of the Federal Republic of Germany ("VIONA").
W I T N E S S E T H :
WHEREAS, pursuant to a Sales Agreement Concerning Shares entered into
and consummated on the date hereof (to be effective as of December 31, 1997)
between the Shareholders, CINCO and QUADRANT and as amended March 23, 1998 (the
"Sales Agreement"), CINCO acquired from the Shareholders all of the share
capital (the "Shares") of VIONA on January 16, 1998 (the "Acquisition"); and
WHEREAS, the Shareholders, CINCO and QUADRANT desire to set forth
additional representations, warranties, agreements and conditions to the Sales
Agreement and related Acquisition as set forth in, and required by, Section 9.2
of the Sales Agreement; and
WHEREAS, the parties agree that this Appendix shall be attached to and
become a part of the Sales Agreement but it is not intended to and shall not
change any of the provisions of the Sales Agreement but rather serve to clarify
and complement the Sales Agreement.
NOW, THEREFORE, in consideration of the premises and the agreements,
representations and warranties hereinafter set forth in this Appendix and the
Annexes and Exhibits hereto, and other valuable consideration the receipt of
which is hereby acknowledged, QUADRANT, CINCO and the Shareholders hereby
further agree as follows:
1
<PAGE>
Section 1. Consideration and Delivery.
-------------------------
1.1 Payment of Consideration. The payment of the consideration for
------------------------
the Acquisition shall be made on the dates and in the amounts as set forth in
Schedule A to the Sales Agreement (the "Initial Payment Closing") which will be
consummated no later than ten (10) days after the closing of a private
placement, but in no event later than April 30, 1998. The date and time of the
Initial Payment Closing is hereinafter called the "Initial Payment Closing
Date". QUADRANT, CINCO and the Shareholders agree to use their best efforts to
satisfy promptly all conditions to the respective obligations of the parties
under this Appendix in order to consummate the Acquisition and the additional
transactions required by this Appendix and the Annexes and Exhibits attached
hereto on the date aforesaid, or, if the parties are unable after using such
best efforts to close on such date, to close as soon thereafter as is reasonably
practicable.
1.2 Initial Payment Closing Date Deliveries. (a) On the Initial
---------------------------------------
Payment Closing Date, the Shareholders shall deliver (i) to CINCO evidence of
the transfer of title to the Shares to CINCO effective the date hereof,
accompanied by any requisite transfer tax stamps; (ii) to QUADRANT an Investment
Representation Letter from each of the Shareholders substantially in the form of
Exhibit 1 hereto; (iii) to QUADRANT executed Employment Agreements between each
of the Shareholders and VIONA in the form of Exhibit 2 hereto and evidence that
Stefan Herr and Dietmar Heidrich have entered into employment agreements with
VIONA in form satisfactory to QUADRANT; (iv) an executed copy of a Joinder to
Shareholders' Agreement among the QUADRANT Shareholders from each of the
Shareholders substantially in the form of Exhibit 3 hereto; and (v) QUADRANT and
the recipients of the stock options pursuant to Section 4.4 shall execute and
deliver Stock Option Agreements in substantially the form of Exhibit 4 hereto.
(b) On the Initial Payment Closing Date, CINCO shall deliver or
transfer the Cash Payment and Stock Payment as set forth on Schedule A to the
Sales Agreement.
Section 2. Representations and Warranties of the Shareholders.
--------------------------------------------------
The Shareholders, jointly and severally, represent and warrant to,
and agree with QUADRANT and CINCO as follows:
2
<PAGE>
2.1 VIONA. VIONA is a GmbH duly organized, validly existing and in
-----
good standing under the laws of the Federal Republic of Germany, has the power
to own and lease its properties and to carry on its business as now being
conducted and is not required to qualify to do business in any other
jurisdiction. The Shareholders have caused to be delivered to QUADRANT, true and
complete copies of the charter documents and by-laws, or other constituent
documents of VIONA as in effect on the date hereof which instruments will not be
amended except as contemplated by the Sales Agreement or this Appendix, or
required by law.
2.2 Subsidiaries, Partnerships, Joint Ventures. VIONA does not have
------------------------------------------
any equity or other proprietary interest in any corporation, partnership, joint
venture or other business entity.
2.3 Authority Relative to Sales Agreement and Appendix. Each
--------------------------------------------------
Shareholder has the capacity, full legal right, power and authority to enter
into the Sales Agreement and this Appendix, and each of the Sales Agreement and
this Appendix is binding upon, and enforceable against, each of the Shareholders
in accordance with its terms, and no further action by the Shareholders, except
for the appearance before a German Notary on the date hereof to approve the
Sales Agreement, is required in order to consummate the within transactions. The
transfer to CINCO of the Shares contemplated by the Sales Agreement shall vest
in CINCO legal title to the Shares free and clear from all mortgages, liens,
claims and other encumbrances whatsoever. None of the execution and delivery of
the Sales Agreement and this Appendix by the Shareholders, consummation by the
Shareholders of the transactions contemplated hereby, or compliance by the
Shareholders with the terms and provisions of the Sales Agreement and this
Appendix, will conflict with, violate or result in a breach of any of the terms,
conditions or provisions of VIONA's Articles of Association or by-laws, or of
any statute, judgment, order, injunction, decree, regulation or ruling of any
court or governmental authority to which VIONA is subject. The consummation of
the transactions contemplated by the Sales Agreement and this Appendix will not
result in the breach of any agreement, contract or commitment of VIONA, or
constitute a material default thereunder, or give to others any rights of
termination, cancellation or acceleration thereunder, other than as set forth on
Annex A, nor will any indenture, instrument, agreement, contract or commitment
to which VIONA is a party be violated or breached so as to prevent such
consummation. No authorization, consent or approval of, or
3
<PAGE>
filing with, any public body or authority is or will be necessary for the
execution, delivery or performance of the Sales Agreement or this Appendix by
the Shareholders or the consummation by the Shareholders of the transactions
contemplated by the Sales Agreement or this Appendix, except as may be set forth
on Annex A.
2.4 Capitalization. The total authorized share capital of VIONA
--------------
consists solely of DM 52,500, and all of such share capital is validly issued
and outstanding, fully paid and nonassessable. There are not any subscriptions,
options, calls or other agreements, commitments or demands of any character,
obligating VIONA to issue any share capital or securities convertible into share
capital of VIONA or which restrict the transfer of the share capital currently
held by the Shareholders.
2.5 Officers and Directors. Annex B contains a list of the
----------------------
directors, officers and employees of VIONA. VIONA has heretofore furnished to
QUADRANT a list setting forth the rates of compensation being paid by VIONA to
each such director, officer and employee, and the term of office of each if not
terminable at will by VIONA's Board of Directors.
2.6 Financial Statements. Since the date of the financial statements
--------------------
referred to in Section 5.1 of the Sales Agreement, there has not been any
materially adverse change in the financial condition, assets or properties,
operations or business including any damage or destruction of property by fire
or other casualty, whether or not covered by insurance, or any conduct of
business other than in ordinary course, with respect to VIONA.
2.7 Borrowings and Guarantees. Annex C lists all notes, mortgages,
-------------------------
indentures and other obligations and agreements and other instruments for or
relating to any lending or borrowing (including assumed debt) in excess of
$10,000 effected by VIONA or to which VIONA is a party or to which any of its
properties or assets is subject. Except as disclosed in Annex C, VIONA is not
directly or indirectly liable upon or with respect to any other debt or
obligation relating to any lending or borrowing, except (i) as made in the
ordinary course of business or (ii) as does not exceed $25,000 in the aggregate.
The Shareholders have furnished QUADRANT true and complete copies of each
document referred to in Annex C.
4
<PAGE>
2.8 Real Property. VIONA does not own any real property.
-------------
2.9 Personal Property. The personal property of VIONA is not subject
-----------------
to any liens, encumbrances or imperfections of title (except for liens for
current taxes not yet payable) which either have not been reflected or reserved
for on the books and records of VIONA or which would reduce the book value of
such properties to less than that reflected on such books and records.
2.10 Leaseholds. Annex D lists all leases or agreements under which
----------
VIONA is lessee of or holds any real property, or is the lessee of or holds any
personal property, where the annual rental payable is in excess of $25,000 per
year, or where, in the case of real property, the term extends beyond one year.
Except as set forth on Annex D, each of the leases listed on Annex D is, to the
best knowledge of VIONA, valid and enforceable, VIONA has not received any
notice of default by it under the terms of any such instrument, which default
remains uncured as of the date hereof, and VIONA is not in material default
under the terms of any such instrument.
2.11 Insurance. Annex E lists all policies of insurance covering
---------
VIONA, any of VIONA's properties and the directors and officers of VIONA,
(specifying the insurer, amount of coverage, type of insurance, policy number).
Any pending claims against or by VIONA which are material to VIONA are listed in
Annex E. True copies of all such policies have been delivered to QUADRANT. Such
policies are in amounts which are deemed to be adequate by the Shareholders,
provide coverage in accordance with industry norms, and will be maintained in
effect through the Initial Payment Closing Date. All of the policies listed on
Annex E are currently in effect and there has not been any failure to give any
notice or to present any claim under any insurance policy in due and timely
fashion which claim is material to VIONA.
2.12 Intellectual Property. Annex F lists all patent, trademark and
---------------------
copyright registrations (registered or common law) and applications owned by
VIONA, and all of the products and technology produced by VIONA (the
"intellectual property").
5
<PAGE>
The Shareholders represent and warrant that: (i) all of the
intellectual property listed on Annex F is presently existing and has not been
abandoned; (ii) all of the intellectual property created by or for VIONA as set
forth on Annex F was developed and executed by VIONA employees as consultants
bound by written work made for hire agreements and assignment agreements
providing for VIONA's proprietary ownership of the respective intellectual
property set forth; (iii) no other firm, corporation, association or person has
(a) the right to use any such intellectual property in commerce on the products
on which they are now being used either in identical form thereof or in such
near resemblance thereof as to be likely, when applied to the goods of any such
person, to cause confusion or to cause mistake or to deceive, (b) claimed any
ownership or right to use such intellectual property; or (c) is infringing upon
any such intellectual property in any material way; and (iv) VIONA has not
received any form of notice that any such intellectual property is alleged to be
invalid or to infringe upon the rights of any other person. Notwithstanding the
provisions of Section 2.12(i) through (iv), the Shareholders acknowledge and
agree that VIONA and QUADRANT have been sharing the right to use, develop,
license and sell the intellectual property (ownership right) and shall continue
to share this right to the intellectual property as listed on Annex F.
2.13 Labor Matters. VIONA is not a member of an association of
-------------
employers. The Shareholders are not aware of any notice having been received by
VIONA of any unresolved violation or alleged violation of any law or regulation
relating to civil or human rights or employment laws generally.
2.14 Employee Benefits. VIONA does not have any employee benefits
-----------------
other than optional Christmas and holiday payments, the benefits listed on Annex
E for Messrs. Sigmund, Horak and Ringelberg (a copy of these contracts have been
delivered to QUADRANT) and those benefits required by German law.
2.15 Material Contracts. Except as set forth in Annex G or elsewhere
------------------
in this Appendix or any Annex hereto, VIONA is not a party to any (a) contract
with any director, officer or employee of VIONA, or any member of his or her
family or any entity affiliated with any such person; (b) consulting agreement
(requiring payments in excess of $10,000 per year or aggregate payments in
excess of $25,000); (c) agreement (requiring total payments in excess of
6
<PAGE>
$50,000) for the construction of plants or facilities or associated
architectural, engineering or other related services; (d) distributor, dealer,
manufacturer's representative, sales agency or advertising agency contract which
is not terminable on 90 days' (or less) notice without premium or penalty; (e)
joint venture contracts or any other agreement involving the sharing of profits;
(f) license or distributor agreements; (g) material permits, licenses or
approvals (other than qualification to do business) issued by any governmental
authority or agency; (h) material contracts terminable by the other party
thereto upon a change of control of VIONA; or (i) other contracts, agreements or
arrangements, entered into other than in the ordinary course of business,
involving an estimated total payment or payments in excess of $50,000. True and
correct copies of each contract or agreement listed on Annex G have been
delivered to QUADRANT.
Except as set forth in Annex G, all contracts, agreements, plans and
arrangements listed on Annex G are in full force and effect and, to the best
knowledge of the Shareholders, are without any default by any party thereto.
2.16 Compliance with Laws. References is made to Section 5.6 of the
--------------------
Sales Agreement. In addition, VIONA has not been notified by any regulatory
authority that it is in violation of any statute, ordinance, regulation or order
which have application to its business, and the Shareholders are not aware of
any violation of any such law, ordinance, regulation or order which would result
in any loss or expense which would be material to VIONA. All material licenses
and permits necessary for the conduct of the business of VIONA consistent with
past practices are in force and effect. No unresolved violations are or have
been recorded in respect of any such license or permit of VIONA and no
proceeding is pending or threatened to revoke or limit any such license or
permit. There are no inspection reports or similar communications issued or
released by any governmental authority relating to the business or properties of
VIONA, and which asserts a deficiency not yet corrected or a matter still in
dispute, which deficiency or matter is material to VIONA.
2.17 Tax Matters. All taxes assessed by any governmental authority
-----------
have been fairly reflected on the books of VIONA in accordance with generally
accepted accounting practices consistently applied, and the required tax returns
have been filed or legal extensions of
7
<PAGE>
time for filing have been obtained. No taxing authorities have asserted any
unresolved deficiencies with respect to tax liabilities.
2.18 Conduct of Business. Since January 1, 1997, VIONA has not done
-------------------
or agreed to do any of the following, other than as set forth in the Annexes
hereto or as permitted or contemplated by the Sales Agreement or this Appendix:
(a) issue any share capital, notes, or other corporate securities or debt
instruments, or grant any options, warrants or other rights calling for the
issue thereof; (b) incur, assume, guarantee, or become subject to, or surety on,
any indebtedness or obligation relating to any lending or borrowing or any other
liability or commitment except current liabilities and commitments incurred in
the ordinary course of business; (c) pay any obligation or liability other than,
in the ordinary course of business; (d) declare or make any payment of dividends
or distributions of any assets of any kind whatsoever to shareholders or
purchase or redeem any of its share capital; (e) purchase or lease any real
property; (f) mortgage, pledge or subject to lien, charge or any other
encumbrance any of its assets, tangible or intangible; (g) enter into any
transaction other than in the ordinary course of business; (h) increase the rate
of regular or special compensation payable to or to become payable by it to any
of its officers, employees, consultants, or agents over the rate being paid them
at January 1, 1997, other than normal merit increases, or pay any severance or
termination pay to any officer, employee or consultant other than pursuant to
its normal business practice; (i) make any increase in any bonus, insurance,
pension or other employee benefit plan payments or arrangements made to, for or
with any officers or employees; (j) introduce any new or materially changed
method of management, operation or accounting in respect of its business or any
of the assets, properties or rights applicable thereto; (k) conduct its business
other than in the ordinary course consistent with past practice; or (1) enter
into any contract, agreement or other instrument (including amendments) of the
type specified in Section 2.15 hereof; (m) merge or consolidate with any other
corporation or similar entity or sell all or substantially all of its assets and
business or acquire all or substantially all of the stock or business or assets
of any other person, firm, association, corporation or business organization, or
agree to do any of the foregoing; (n) sell, assign or transfer any patents,
trademarks, trade names, copyrights, or other material intangible assets; (o)
waive any right of material value; or (p) make any change in its Articles of
Association or other governing instruments.
8
<PAGE>
Except as contemplated by the Sales Agreement and this Appendix,
between the date hereof and the Initial Payment Closing Date, VIONA will not,
without prior disclosure to and written consent of QUADRANT, do any of the
things listed in the preceding paragraph. Notwithstanding the provisions of this
Section 2.18, the Shareholders have informed QUADRANT that in 1997 partnership
interests in VIONA of one percent (1%) were bought back by VIONA for DM 500.00
and with respect to a capital appreciation the partnership interests in VIONA
were each increased to DM 17,500.00, for a total capital contribution of DM
52,500.00. In addition, the power of attorney held by Mr. Thomas Pfrengle, who
resigned as fully authorized officer getting a severance payment of DM
95,000.00, was withdrawn. Furthermore, notwithstanding the provisions of this
Section 2.18, the Shareholders have informed QUADRANT that they have passed a
Shareholders' Agreement concerning declaration of dividends for the year 1996
and concerning establishing of accruals.
2.19 Bank Accounts. Annex H contains a complete list of all bank
-------------
accounts maintained by VIONA and all persons entitled to draw thereon. The
Shareholders have delivered to QUADRANT a complete list of safe deposit boxes
listing all persons with access thereto.
2.20 Powers of Attorney. The Shareholders have delivered to QUADRANT
------------------
a complete list of all persons holding powers of attorney from VIONA, together
with copies of such powers of attorney, including the Power of Attorney held by
Johannes Breh of the law firm of Honold & Partner to legally represent VIONA.
2.21 Books of Account; Returns and Reports. The books of account of
-------------------------------------
VIONA reflect its significant items of income and expense, and its significant
assets, liabilities and accruals.
2.22 Raw Materials. VIONA is not experiencing any interruption in
-------------
the supply of raw materials which has had or threatens to have any material
adverse effect on the business of VIONA.
2.23 Diligence Investigation. The Shareholders have made a diligent
-----------------------
effort in the Annexes to this Appendix and in meetings with representatives of
QUADRANT and in other
9
<PAGE>
materials delivered to QUADRANT to communicate to QUADRANT all information
(other than information generally known in the industry) which the Shareholders
believe would materially adversely affect the business of VIONA. No annex,
exhibit or other information furnished by the Shareholders to QUADRANT in
connection with the Sales Agreement or this Appendix contains any untrue
statement of a material fact or omits a material fact which thereby in light of
the circumstances in which it was made, or omitted, could mislead QUADRANT or
its representatives.
Section 3. Representations of QUADRANT and CINCO.
-------------------------------------
QUADRANT and CINCO represent and warrant to, and agree with, the
Shareholders as follows:
3.1 Organization and Qualification. QUADRANT is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and CINCO is a GmbH duly organized, validly
existing and in good standing under the laws of the Federal Republic of Germany,
and each has all requisite corporate power and authority to enter into and carry
out its obligations under the Sales Agreement and this Appendix and the Sales
Agreement and this Appendix constitute binding obligations of each of QUADRANT
and CINCO enforceable against them according to its terms, except as may be
limited by laws of general application. The execution and delivery of the Sales
Agreement and this Appendix and the consummation of the transactions
contemplated thereby and hereby have been duly authorized by the Board of
Directors of QUADRANT and all necessary corporate action on behalf of CINCO has
been taken and no other corporate proceedings on the part of either QUADRANT or
CINCO (including shareholder action) are necessary to authorize the Sales
Agreement and this Appendix and the transactions contemplated thereby and
hereby. None of the execution and delivery of the Sales Agreement and this
Appendix by QUADRANT and CINCO, consummation by QUADRANT and CINCO of the
transactions contemplated thereby and hereby or compliance by QUADRANT and CINCO
with the terms and provisions thereof and hereof, will conflict with or result
in the breach of any of the terms, conditions or provisions of the Certificate
of Incorporation or By-Laws of QUADRANT, or the Article of Association and other
corporate documents of CINCO, or of any statute, judgment, order, injunction,
decree, regulation or ruling of any court or governmental authority to which
QUADRANT or CINCO is subject or of any agreement, contract or commitment which
is
10
<PAGE>
material to the business or properties of QUADRANT or CINCO, or constitute a
material default thereunder, or give to others any material rights of
termination, cancellation or acceleration thereunder. No authorization, consent
or approval of, or filing with, any public body or authority is necessary for
the consummation by CINCO and QUADRANT of the transactions contemplated by the
Sales Agreement and this Appendix, except as may be set forth on Annex A.
3.2 QUADRANT Stock to be Delivered. The shares of QUADRANT Common
------------------------------
Stock which are to be delivered by CINCO pursuant to Schedule A of the Sales
Agreement will be, when so delivered, validly authorized, duly issued, fully
paid and nonassessable.
3.3 Financial Statements. QUADRANT has furnished to the Shareholders
--------------------
audited financial statements for the years ended December 31, 1995 and 1996 and
unaudited monthly financial statements for the period January 1, 1997 through
November 30, 1997. Such financial statements fairly present the financial
condition at the dates of the Balance Sheets and the results of operations of
QUADRANT for the periods indicated. Since November 30, 1997 there has been no
material adverse change in the business or financial condition of QUADRANT.
Section 4. Additional Agreements of the Parties.
------------------------------------
4.1 Consents. The Shareholders agree to use their best efforts to
--------
obtain, prior to the Initial Payment Closing Date, any required consents to the
consummation of the transactions contemplated by the Sales Agreement or this
Appendix, in form and substance satisfactory to QUADRANT, CINCO and their
counsel.
4.2 Maintain Subject Business as a Going Concern. Prior to the
--------------------------------------------
Initial Payment Closing Date, the Shareholders, working with QUADRANT and CINCO,
shall use their best efforts to cause VIONA to maintain its assets, properties
and business in accordance with past practices and sound business judgment and
to preserve the goodwill of the suppliers, employees, customers and others
having business relations with VIONA.
11
<PAGE>
4.3 Consent to Jurisdiction in Connection with Appendix. (a) To the
---------------------------------------------------
extent that German law does not imperatively govern the Sales Agreement and this
Appendix, each of the Shareholders hereby irrevocably submits to the
jurisdiction of any state or federal court sitting in the Borough of Manhattan,
City and State of New York for purposes of any suit, action or proceeding
arising out of or related to the provisions of this Appendix and the Annexes and
Exhibits hereto. Nothing contained in this Section 4.3 shall conflict with or
supersede the provisions of Section 10.4 of the Sales Agreement which shall be
applicable to the terms of the Sales Agreement as well as those terms of the
Appendix repeating and/or explaining and/or detailing and/or executing terms and
conditions of the Sales Agreement. Each of the Shareholders hereby irrevocably
waives, to the fullest extent permitted by law, any objection which he may have
to the laying of the venue of any such suit, action or proceeding brought in
such a court and any claim that any such suit, action or proceeding brought in
such a court has been brought in an inconvenient forum as it relates to issues
arising under this Appendix. Each of the Shareholders also agrees that final
judgment in any such suit, action or proceeding brought in such court shall be
conclusive and binding upon him and may be enforced in any court, to the
jurisdiction of which he is subject, by a suit upon such judgment; provided,
however, that service of process is effected upon him in the manner specified
herein.
(b) Each of the Shareholders agree that service of all writs, claims,
process and summonses in any suit, action or proceeding described above against
him in the State of New York may be made upon Corporation Service Company, 80
State Street, Albany, NY 12207-2543 (the "Process Agent"), and each of the
Shareholders irrevocably appoints the Process Agent as his agent and true and
lawful attorney-in-fact in his name, place and stead to accept such service of
any and all such writs, claims, process and summonses, and agrees that the
failure of the Process Agent to give any notice to him of any such service of
process shall not impair or affect the validity of such service or of any
judgment based thereon. Each of the Shareholders agrees to maintain for a
period of three (3) years after the Initial Payment Date an agent with offices
in New York to act as his Process Agent. According to Section 10.1 of the Sales
Agreement, the costs of the Process Agent shall be borne by QUADRANT. Nothing
herein shall in any way be deemed to limit the ability to serve any such writs,
process or summonses in any other manner permitted by applicable law.
12
<PAGE>
4.4 Stock Options and Capital Contributions. QUADRANT agrees to issue
---------------------------------------
to employees of VIONA, as agreed to between QUADRANT and the Shareholders,
options to purchase 4,700,000 shares of QUADRANT's Common Stock (all such
options to be at an exercise price of $.25 per share), to be evidenced by Stock
Option Agreements in the form of Exhibit 4. QUADRANT further agrees to make a
capital contribution to VIONA to the total amount of $1,000,000.00, payable in
two installments to the amount of $500,000.00 each no later than April 30, 1998
and September 30, 1998. Such capital contributions will be applied to the
benefit plan established on behalf of the VIONA employees.
4.5 Exchange Rate Guarantee. Quadrant guarantees that the cash
-----------------------
payment in the amount of $ 850,000.00 according to Schedule A of the Sales
Agreement will be at an exchange rate of DEM 2.00 per USD $1.00.
Section 5. Right to Investigate. After the date hereof, and at all
--------------------
times prior to the Initial Payment Closing Date, the Shareholders shall afford
to representatives of QUADRANT and CINCO, reasonable access to the offices,
plants, properties, books, contracts and records of VIONA during normal business
hours, in order that QUADRANT may have full opportunity to make such
investigations as it desires of the affairs and assets of VIONA. In the event of
termination of the Sales Agreement and this Appendix QUADRANT shall, at the
request of the Shareholders, deliver to VIONA all documents, work papers and
other material obtained by QUADRANT and CINCO, or on their behalf, from VIONA
and all copies thereof, whether so obtained before or after the execution of the
Sales Agreement and this Appendix, and shall not themselves use directly or
indirectly or through any subsidiary, any confidential information so obtained,
or otherwise obtained from VIONA hereunder or in connection herewith (unless
such information is generally known in the industry or was acquired by QUADRANT
or CINCO prior to receipt thereof from VIONA or was acquired after the date
hereof from a third party having a bona fide right to provide the same to
QUADRANT or CINCO), and shall endeavor to have all such information kept
confidential and not used in any manner.
Section 6. Conditions to the Obligations of All Parties. The
--------------------------------------------
obligations of each of the parties hereto are subject to the conditions that:
13
<PAGE>
(a) At the Initial Payment Closing Date, no bona fide suit, action,
investigation or other proceeding will have been instituted (or will be
threatened) by any governmental agency of the United States or Germany in which
it is sought to restrain, prohibit, invalidate or set aside the transactions
contemplated by the Sales Agreement and this Appendix; and
(b) QUADRANT shall have raised additional equity of at least $
15,000,000.00 through a private placement being managed by Lehman Brothers (the
"Private Placement").
Section 7. Conditions to the Obligations of QUADRANT and CINCO.
---------------------------------------------------
The obligations of QUADRANT and CINCO are subject to the conditions that:
7.1 Representations and Warranties. The representations and
------------------------------
warranties of the Shareholders contained in the Sales Agreement and this
Appendix will have been true and correct in all material respects when made and,
in addition, will be true and correct in all material respects at and as of the
Initial Payment Closing Date, except for representations and warranties which
refer to a specific date or dates other than the Initial Payment Closing Date
(which will be true and correct in all material respects at such date or dates)
and except for changes contemplated and permitted by this Appendix with the same
force and effect as if made at and as of the Initial Payment Closing Date, and
the Shareholders will have performed or complied in all material respect with
all terms, agreements, covenants and conditions required by this Appendix to be
performed by them on or prior to the Initial Payment Closing Date. QUADRANT and
CINCO will have received a certificate, dated the Initial Payment Closing Date
and executed by the Shareholders, to the effect that the foregoing conditions
have been satisfied.
7.2 Absence of Changes. During the period from December 31, 1997 to
------------------
the Initial Payment Closing Date, there will not have been any material adverse
loss of or damage to the properties, financial condition, results of operations
or assets of VIONA. Prior to the Initial Payment Closing Date, the Shareholders
agree to advise QUADRANT of any such loss or damage which has such a material
adverse effect.
7.3 Consents. On or prior to the Initial Payment Closing Date, the
--------
consents on Annex A will have been obtained in a manner satisfactory in form and
substance to QUADRANT and CINCO and their counsel.
14
<PAGE>
7.4 Approval of Legal Matters by Dunnington, Bartholow & Miller LLP.
---------------------------------------------------------------
All legal matters relating to the transactions contemplated by this Appendix and
the Initial Payment Closing shall be approved on behalf of QUADRANT and CINCO by
Dunnington, Bartholow & Miller LLP, which approval shall not be unreasonably
withheld, and there shall have been furnished to such counsel by VIONA such
information and certificates as they may reasonably have requested for such
purpose.
7.5 Legality; Litigation Affecting Initial Payment Closing. There
------------------------------------------------------
shall exist no applicable law, rule, regulation, order, judgment or injunction
the effect of which is to prohibit consummation of the transaction contemplated
by the Sales Agreement or this Appendix. No suit, action, or other proceeding
shall be pending or actually threatened before any court or governmental agency
in which any United States or German governmental authority seeks to restrain or
prohibit the consummation of the transactions contemplated thereby or hereby,
and no investigation that might eventuate in any such suit, action or proceeding
shall be pending or threatened.
7.6 Employment Agreements. The Employment Agreements required by
---------------------
Section 1.2(a) will have been executed and delivered by the Shareholders and
other employees.
Section 8. Conditions to the Obligations of the Shareholders. The
-------------------------------------------------
obligations of the Shareholders are subject to the conditions that:
8.1 Corporate Authorization. On or before the Initial Payment Closing
-----------------------
Date, QUADRANT and CINCO will have furnished to the Shareholders a copy
certified by their respective Secretaries of resolutions duly adopted by the
Board of Directors or Shareholders of QUADRANT and CINCO that constitutes all
necessary corporate authorization for the consummation by CINCO and QUADRANT of
the transactions contemplated by the Sales Agreement and this Appendix.
8.2 Representations and Warranties. The representations and
------------------------------
warranties of QUADRANT and CINCO contained in the Sales Agreement and this
Appendix will have been true and correct in all material respects when made and,
in addition, will be true and correct in all material respects at and as of the
Initial Payment Closing Date, except for representations and warranties which
refer to a specified date or dates other than the Initial Payment Closing Date
15
<PAGE>
(which will be true and correct in all material respects at such date or dates)
and except for changes expressly permitted by the Sales Agreement and this
Appendix or otherwise occurring in the ordinary course of business (except to
the extent expressly limited in this Appendix), with the same force and effect
as if made at and as of the Initial Payment Closing Date and QUADRANT and CINCO
will have performed or complied in all material respects with all terms,
agreements and covenants and conditions required by this Appendix to be
performed by them on or prior to the Initial Payment Closing Date. The
Shareholders will have received a certificate, dated the Initial Payment Closing
Date and executed on behalf of each of QUADRANT and CINCO, to the effect that
the foregoing conditions have been satisfied.
8.3 Consents. On or prior to the Initial Payment Closing Date, the
--------
Shareholders shall have obtained the consents, in form and substance
satisfactory to their counsel, which are listed on Annex A.
8.4 Approval of Legal Matters by Counsel to the Shareholders and
------------------------------------------------------------
VIONA. All legal matters relating to the transactions contemplated by the Sales
- -----
Agreement and this Appendix and the Initial Payment Closing shall be approved on
behalf of the Shareholders by Rae. Honold & Partner which approval shall not be
unreasonably withheld, and there shall have been furnished to such counsel by
QUADRANT and CINCO such information and certificates as they may reasonably have
requested for such purpose.
8.5 Legality; Litigation Affecting Initial Payment Closing. There
------------------------------------------------------
shall exist no applicable law, rule, regulation, order, judgment or injunction
the effect of which is to prohibit consummation of the transactions contemplated
by the Sales Agreement and this Appendix. No suit, action, or other proceeding
shall be pending or actually threatened before any court or governmental agency
in which any United States or German governmental authority seeks to restrain or
prohibit the consummation of the transactions contemplated thereby or hereby,
and no investigation that might eventuate in any such suit, action or proceeding
shall be pending or threatened.
Section 9. Indemnification.
---------------
9.1 Indemnification by the Parties. Reference is made to Section 6 of
------------------------------
the Sales Agreement. In addition the Shareholders and QUADRANT (including CINCO)
each
16
<PAGE>
hereby agree to indemnify the other and their respective directors, officers,
agents and employees, and to hold each of them harmless from and against any
losses, claims, damages or liabilities, joint or several, to which they, or any
of them, may become subject insofar as such losses, claims, damages or
liabilities arise out of or are based upon the Shareholders' or QUADRANT's
breach of or failure to perform any representation, warranty, covenant, term or
condition of the Sales Agreement or this Appendix; provided, however, the
indemnification provided for in this Section 9.1 shall terminate three (3) years
after the Initial Payment Closing Date except for the representation by the
Shareholders contained in Section 2.3 of this Appendix, which shall continue
without time limitation. This Section 9.1 is explicitly agreed to be subject to
German Law.
Section 10. Certain Covenants of the Parties.
--------------------------------
10.1 Separate Existence of VIONA. QUADRANT covenants and agrees with
---------------------------
the Shareholders that so long as none of the Shareholders has voluntarily
terminated his employment with VIONA prior to the third anniversary of the
Initial Payment Closing Date (except due to death or disability), it will cause
VIONA to be maintained as a separate, wholly-owned affiliated entity of
QUADRANT, or any successor to QUADRANT, (the "VIONA Entity") from and after the
Initial Payment Closing Date for a minimum of three (3) years. During such three
(3) year period QUADRANT agrees to provide funds to the VIONA Entity of at least
$90,000 per month to cover salaries of the Shareholders and the employees
assigned to the VIONA Entity and the costs associated with the continuing
development of all PC-Convergence products for QUADRANT as the Shareholders,
through VIONA, have been doing.
10.2 Location of VIONA Entity Office. For at least a three (3) year
-------------------------------
period after the Initial Payment Closing Date, QUADRANT covenants and agrees
that the VIONA Entity's office shall not be moved from its present location in
Karlsruhe, Germany, without the written consent of the Shareholders.
10.3 Full Time Effort by the Shareholders. From and after the Initial
------------------------------------
Payment Closing Date, the Shareholders covenant and agree with QUADRANT that
they will diligently devote their full time attention and efforts toward
maintaining and improving the VIONA Business as being run through the VIONA
Entity. The Shareholders agree to keep the Board of
17
<PAGE>
Directors and management of QUADRANT fully informed on a regular basis as to
the VIONA Business as continued to be managed and run by them.
Section 11. Termination, Amendment and Waiver.
---------------------------------
11.1 Termination. This Appendix may be terminated at any time prior
-----------
to the Initial Payment Closing Date:
(a) by mutual consent of the Shareholders, QUADRANT and CINCO; or
(b) by QUADRANT and CINCO if the Private Placement has not been
consummated by April 30, 1998.
11.2 Effect of Termination. In the event of any termination of this
---------------------
Appendix pursuant to the terms hereof, none of the parties to this Appendix will
have any liability to the others except for any willful breach of any of the
provisions of this Appendix.
11.3 Amendment. This Appendix may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto.
11.4 Extension; Waiver. The parties hereto may (i) extend the time
-----------------
for the performance of any of the obligations or other acts of the other parties
hereto, or (ii) waive any inaccuracies in the representations and warranties.
11.5 Prior Agreement. QUADRANT and the Shareholders acknowledge that
---------------
they had previously entered into an agreement pursuant to which QUADRANT inter
alia was to acquire part of the share capital of VIONA and VIONA was to acquire
shares of Common Stock of QUADRANT (stock-swap). QUADRANT and the Shareholders
acknowledge that the foregoing stock-swap was never consummated and that the
Sales Agreement and this Appendix and the transactions contemplated thereby or
hereby are in full and complete satisfaction of all prior agreements relating to
this matter.
Section 12. Broker's and Finder's Fees. The Shareholders represent
--------------------------
and warrant that no broker or finder is entitled to any brokerage or finder's
fee or other commission or fee from the Shareholders based upon arrangements
made by or on behalf of the Shareholders
18
<PAGE>
with respect to the transactions contemplated by the Sales Agreement and this
Appendix. QUADRANT and CINCO represent and warrant that no broker or finder is
entitled to any brokerage or finder's fee or other commission or fee from
QUADRANT or CINCO based upon arrangements made by or on behalf of QUADRANT or
CINCO with respect to the transactions contemplated by the Sales Agreement and
this Appendix.
Section 13. No Public Announcement. Neither the Shareholders,
----------------------
QUADRANT nor CINCO shall, without the approval of the other parties, make any
press release or other public announcement concerning the transactions
contemplated by this Appendix, except as and to the extent that either party
shall be so obligated by law, in which case the other party shall be advised and
the parties shall use their best efforts to cause a mutually agreeable release
or announcement to be issued.
Section 14. Notices. All notices and other communications hereunder
-------
will be in writing and will be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses, or at such other address for a party as may be specified by
like notice:
(a) if to the Shareholders, to Viona Development Hard & Software
Engineering, GmbH, Karlstr. 27, D-76133, Karlsruhe, Germany, Attention Jorg
Ringelberg, Principal, with a copy to Rae. Honold & partner, Mr. Johannes Breh,
Postfach 21 06 51, D-76156 Karlsruhe; and
(b) if to QUADRANT and CINCO, to Quadrant International, Inc., 269
Great Valley Parkway, Malvern, PA 19355, Attention Francis E. Wilde, President,
with a copy to Dunnington, Bartholow & Miller LLP, 666 Third Avenue, New York,
NY 10017, Attention Robert T. Lincoln, Esq.
Section 15. Interpretation. Unless otherwise specified, all
--------------
references to Articles, Sections, Exhibits or Annexes herein are references to
Articles, Sections, Exhibits or Annexes hereof or hereto. The headings contained
in this Appendix are for reference purposes only and will not affect in any way
the meaning or interpretation of this Appendix.
19
<PAGE>
Section 16. Cooperation. Each of the parties hereto shall cooperate
-----------
with the others in every way in carrying out the transactions contemplated
herein, and delivering instruments to perfect the conveyances, assignments and
transfers contemplated herein, and in delivering all documents and instruments
deemed reasonably necessary or useful by counsel for any party hereto. The
parties hereto agree with each other that subsequent to the Initial Payment
Closing Date they will grant to each other and their agents access during normal
business hours, upon reasonable notice, to any books and records relating to the
operation of VIONA prior to the Initial Payment Closing Date by the Shareholders
or after the Initial Payment Closing Date by QUADRANT, CINCO or their
affiliates, and such access is shown to be needed for tax, accounting or other
reasonable purposes.
Section 17. Waiver, Discharge, Etc. This Appendix may not be
----------------------
released, discharged, abandoned, changed or modified in any manner, except by an
instrument in writing signed on behalf of each of the parties hereto or by their
duly authorized officers or representatives. The failure of any party hereto to
enforce at any time any of the provisions of this Appendix shall in no way be
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Appendix or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Appendix shall be held to be a waiver of any other or subsequent breach.
The illegality or partial illegality of any provision of this Appendix in any
country shall not affect the validity of this Appendix or any provision hereof
in any other country.
Section 18. Non-Competition. Except as may otherwise be agreed by
---------------
the parties, especially in any employment agreement, and except as contemplated
by the Sales Agreement and this Appendix, the Shareholders agree that until
January 31, 2001, neither they nor any business entity controlled by them, will
directly or indirectly, in the United States or Germany engage in the business
of manufacturing or marketing the products based on the intellectual property
described on Annex F or any products substantially similar thereto so long as
VIONA, QUADRANT or CINCO or any successor to QUADRANT's business shall engage in
such activity in such location.
20
<PAGE>
Section 19. Miscellaneous. The Sales Agreement and this Appendix
-------------
(including the Exhibits, Schedules, Annexes, documents and instruments referred
to herein) (a) constitute the entire agreement and supersede all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder; (c) shall not be
assigned by operation of law or otherwise; and (d) except as provided in Section
10.4 of the Sales Agreement and Section 4.3 of this Appendix, and except as
explicitly set forth in any Section of this Appendix, shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York.
This Appendix exists in both an English and a German version. For the
purposes of interpreting this Appendix, the English version takes precedence.
This Appendix may be executed in two or more counterparts which
together will constitute a single agreement.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Appendix to
Sales Agreement as of the day and year first above written.
THE SHAREHOLDERS ERSTE CINCO VERMOGENSVERWALTUNGS GmbH
/s/ Hendrik Horak By /s/ Jason Liu
- ------------------------------ ------------------------------------
Hendrik Horak Jason Liu, Managing Director
/s/ Jorg Ringelberg QUADRANT INTERNATIONAL, INC.
- ------------------------------
Jorg Ringelberg
/s/ Ulrich Sigmund By /s/ Francis E. Wilde
- ------------------------------ ------------------------------------
Ulrich Sigmund Francis E. Wilde, President
22
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIVICORE INC.
The undersigned, Francis E.J. Wilde III and Jason C. Liu, hereby
certify that:
ONE: They are the duly elected and acting President and Secretary,
---
respectively, of said corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on April __, 1999.
THREE: The Certificate of Incorporation of said corporation shall be
-----
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Divicore Inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is the
Corporation Trust Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that the Corporation is authorized to issue is fifty five million
(55,000,000). Fifty million (50,000,000) shares shall be Common Stock, par value
$0.001 per share, and five million (5,000,000) shares shall be Preferred Stock,
par value $0.001 per share.
<PAGE>
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon each series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or of any of them. The rights, privileges, preferences and
restrictions of any such additional series may be subordinated to, pari passu
----------
with (including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote), or senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. The Board of Directors is also authorized to
increase or decrease the number of shares of any series prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
Upon the filing of this Amended and Restated Certificate of
Incorporation, each outstanding share of Common Stock shall be converted into
_____ (___) shares of Common Stock or Preferred Stock, as the case may be (the
"Stock Split"). No fractional shares of Common Stock or Preferred Stock, as the
case may be, shall be issued upon the Stock Split. In lieu of any fractional
shares to which the holder would otherwise be entitled (after aggregating all
such shares of Common Stock, to which such holder is entitled), the Corporation
shall pay such holder such amount in cash as such fractional share represents
based on the fair market value of the Common Stock as of the date hereof.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
<PAGE>
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common Stock, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three (3) years. At the third annual meeting of stockholders following the
initial public offering of the Corporation's Common Stock, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three (3) years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three (3) years to
succeed the directors of the class whose terms expire at such annual meeting.
If the number of directors is hereafter changed, each director then serving as
such shall nevertheless continue as a director of the Class of which he is a
member until the expiration of his current term and any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by
<PAGE>
applicable Delaware law (statutory or non-statutory), with respect to action for
breach of duty to the Corporation, its stockholders, and others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty or loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (3) shall have derived an improper personal benefit. If
the GCL is hereafter amended to authorize the further elimination or limitation
of the liability of a director, the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that
<PAGE>
the claimant has not met the standards of conduct which make it permissible
under the GCL for the Corporation to indemnify the claimant for the amount
claimed, but the claimant shall be presumed to be entitled to indemnification
and the Corporation shall have the burden of proving that the claimant has not
met the standards of conduct for permissible indemnification set forth in the
GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
_______ __, 1999.
__________________________________________
Francis E.J. Wilde III
President
__________________________________________
Jason C. Liu
Secretary
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
DIVICORE INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
----------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
----------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
----------
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
----------
and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
<PAGE>
Section 3. Written notice of the annual meeting stating the place,
----------
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
----------
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
----------
purposes, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
----------
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
----------
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
----------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all
2
<PAGE>
meetings of the stockholders for the transaction of business except as otherwise
provided by statute or by the certificate of incorporation. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
either the Chairman of the Board, or the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
----------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable statute
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question.
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. Nominations for election to the Board of Directors must
-----------
be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose
3
<PAGE>
or by any stockholder of any outstanding class of capital stock of the
corporation entitled to vote for the election of directors. Nominations by
stockholders must be preceded by notification in writing received by the
secretary of the corporation not less than one-hundred twenty (120) days prior
to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
4
<PAGE>
Section 12. At any meeting of the stockholders, only such business
-----------
shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the
5
<PAGE>
meeting that business was not properly brought before the meeting and in
accordance with the procedures prescribed by this Section 12, and if such person
should so determine, such person shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 12, a stockholder shall
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
-----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class to hold office initially for a
term expiring at the annual meeting to be held in 2000, another class to hold
office initially for a term expiring at the annual meeting of stockholders held
in 2001 and another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2002, with the members of each
6
<PAGE>
class to hold office until their successors are elected and qualified. At each
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
Section 2. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chosen and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
----------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
----------
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the
7
<PAGE>
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
Section 6. Regular meetings of the Board of Directors may be held
----------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
----------
Chairman of the Board or the president on twelve (12) hours' notice to each
director by phone, fax or electronic mail; special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of a majority of the Board unless the Board
consists of only one director, in which case special meetings shall be called by
the Chairman of the Board, the president or secretary in like manner and on like
notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
----------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or
8
<PAGE>
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
9
<PAGE>
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
10
<PAGE>
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors may also choose one or more vice-
presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
11
<PAGE>
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation; and in the absence of the Chairman of the Board he/she shall
preside at all meetings of the stockholders and the Board of Directors; he/she
shall have general and active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
12
<PAGE>
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
13
<PAGE>
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
-----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer of the corporation, shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the corporation.
Section 15. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death,
14
<PAGE>
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his/her
control belonging to the corporation.
Section 16. The treasurer or an assistant treasurer, in the order
-----------
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Chief Financial
Officer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent
15
<PAGE>
such class or series of stock, provided that, except as otherwise provided in
section 202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate that
the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
16
<PAGE>
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
17
<PAGE>
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
18
<PAGE>
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or
19
<PAGE>
was serving at the corporation's request as a director or officer of another
corporation) shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to advance
such expenses to an agent who is a party to an action, suit or proceeding
brought by the corporation and approved by a majority of the Board of Directors
of the corporation which alleges willful misappropriation of corporate assets by
such agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been
20
<PAGE>
"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, Section 145 of the General Corporation Law of Delaware shall,
for the purposes of this Section 6, be interpreted as follows: an "other
enterprise" shall be deemed to include such an employee benefit plan, including
without limitation, any plan of the corporation which is governed by the Act of
Congress entitled "Employee Retirement Income Security Act of 1974," as amended
from time to time; the corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
21
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
DIVICORE INC.
The undersigned, Jason C. Liu, hereby certifies that he is the duly
elected and acting Secretary of Divicore Inc., a Delaware corporation (the
"Corporation"), and that the Bylaws attached hereto constitute the Bylaws of
said Corporation as duly adopted by the Board of Directors on April 21, 1999 and
the Stockholders on ________, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of April, 1999.
________________________________
Jason C. Liu
Secretary
22
<PAGE>
EXECUTION COPY
EXHIBIT 4.2
QUADRANT INTERNATIONAL, INC.
_____________________
REGISTRATION RIGHTS AGREEMENT
_____________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Registration Rights..................................... 2
1.1. Definitions....................................... 2
1.2. Request for Registration.......................... 3
1.3. Company Registration.............................. 5
1.4. Obligations of the Company........................ 5
1.5. Furnish Information............................... 7
1.6. Expenses of Demand Registration................... 7
1.7. Expenses of Company Registration.................. 7
1.8. Underwriting Requirements......................... 8
1.9. Delay of Registration............................. 8
1.10. Indemnification................................... 8
1.11. 1934 Act..........................................11
1.12. Form S-3 Registration.............................11
1.13. Assignment of Registration Rights.................12
1.14. Limitations on Subsequent Registration Rights.....12
1.15. "Market Stand-Off" Agreement......................13
1.16. 1934 Act..........................................13
2. Miscellaneous...........................................14
2.1. Successors and Assigns............................14
2.2. Prior Agreement...................................14
2.3. Governing Law.....................................14
2.4. Counterparts......................................14
2.5. Titles and Subtitles..............................14
2.6. Notices...........................................14
2.7. Expenses..........................................14
2.8. Amendments and Waivers............................14
2.9. Severability......................................15
2.10. Aggregation of Stock..............................15
2.11. Entire Agreement..................................15
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of the _____ day of
April, 1998, by and among Quadrant International, Inc., a Pennsylvania
corporation (the "Company"), and the parties listed on Schedule A hereto
(collectively, the "Investors").
RECITALS
WHEREAS, certain of the Investors hold securities of the Company and
possess certain registration rights with respect to such securities (the
"Existing Investors"); and
WHEREAS, the Existing Investors desire to terminate the registration
rights previously granted to them and to accept the rights created pursuant
hereto in lieu of such previously granted rights; and
WHEREAS, the Investors are parties to the Class B Preferred Stock and
Warrant Purchase Agreement dated as of even date herewith among the Company and
the Investors (the "Purchase Agreement"), and certain of the Company's and such
Investors' obligations under the Purchase Agreement are conditioned upon the
execution of this Agreement by such Investors, the Existing Investors and by the
Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Existing Investors hereby agree that any and all
registration rights previously granted to them shall be superseded and replaced
in its entirety by this Agreement, and the parties hereto hereby further agree
as follows:
1. Registration Rights.
-------------------
The Company covenants and agrees as follows:
1.1. Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(c) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof.
(d) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(e) The term "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in
<PAGE>
compliance with the Act, and the declaration or ordering of effectiveness of
such registration statement or document.
(f) The term "Registrable Securities" means (i) Common
Stock issuable or issued upon conversion of the Class A Convertible Preferred
Stock of the Company, (ii) Common Stock issuable or issued upon conversion of
the Class B Convertible Preferred Stock of the Company and upon exercise of
warrants issued to the holders of Class B Convertible Preferred Stock of the
Company, (iii) Common Stock issuable or issued upon conversion of the Company's
6% Convertible Subordinated Debentures and upon exercise of warrants issued to
the holders of such debentures, (iv) for purposes of Section 1.3 only, up to
6,017,810 shares of Common Stock held by Gregg Garnick ("Garnick"), (v) for
purposes of Section 1.3 only, up to 250,000 shares of Common Stock held by each
of Hendrick Horak, Ulrich Sigmund and Jorg Ringelberg (collectively, the "Viona
Employees"), and (vi) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of the shares referenced in (i), (ii), (iii) (iv) and (v)
above, excluding in all cases, however, any Registrable Securities sold pursuant
to one or more registration statements under the Act, or which are saleable
pursuant to Rule 144(k) under the Act, or which have been sold by a person in a
transaction in which such person's rights under this Section 1 are not assigned.
(g) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(h) The term "SEC" shall mean the Securities and Exchange
Commission.
1.2. Request for Registration.
------------------------
(a) If the Company shall receive at any time after the
effective date of the first registration statement for a public offering of
securities of the Company and after the Company qualifies for registering
securities on a Form S-3 (other than a registration statement relating either to
the sale of securities to employees of the Company pursuant to a stock option,
stock purchase or similar plan or a SEC Rule 145 transaction), a written request
from the Holders of at least (i) sixty-seven percent (67%) of the Registrable
Securities then outstanding or (ii) a majority in interest of the Class B
Preferred Stock, that the Company file a registration statement under the Act
covering the registration of at least twenty percent (20%) of the Registrable
Securities then held by such Holders then the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders; and
(ii) file such registration within 30 days of the
mailing of such notice by the Company in accordance hereof and cause such
registration to be effective as soon
3
<PAGE>
as practicable under the Act of all Registrable Securities which the Holders
request to be registered, subject to the limitations of subsection 1.2(b).
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to subsection 1.2(a) and the
Company shall include such information in the written notice referred to in
subsection 1.2(a). The underwriter will be selected by the Company and shall be
reasonably acceptable to a majority in interest of the Initiating Holders. In
such event, the right of any Holder to include such Holder's Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provision of this Section 1.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, then the Initiating Holders shall so advise all
Holders of Registrable Securities which would otherwise be underwritten pursuant
hereto, and the number of shares of Registrable Securities that may be included
in the underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities issued or issuable upon
conversion of the Class A Preferred Stock and the Class B Preferred Stock of the
Company to be included in such underwriting shall not be reduced unless all
other securities are first entirely excluded from the underwriting.
(c) The Company may include in a registration requested
under Section 1.2(a) any additional authorized shares of the Common Stock of the
Company, whether or not issued, for sale by the Company; provided, however, that
such shares shall not be included to the extent that the Holders of a majority
of the shares of Registrable Securities held by the Investors included therein
determine in good faith that the inclusion of such shares will interfere with
the successful marketing of the shares of Registrable Securities to be included
therein; and provided, further, that if the number of shares to be so included
equals or exceeds the number of shares of Registrable Securities included
therein by the holders of Registrable Securities, such registration shall be
deemed to be a registration pursuant to Section 1.3 hereof.
(d) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2 or Section 1.12, a certificate of the Company signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company, the filing of such registration statement would (A)
interfere with or affect the negotiation or completion of any material
transaction that is being contemplated by the Company or (B) involve initial or
continuing disclosure obligations materially adverse to the best interests of
the Company's shareholders, and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to defer taking
action with respect to such filing for a period of not more than sixty (60) days
after receipt of the request of the Initiating Holders; provided, however, that
the Company
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may not utilize this right more than once in any twelve-month period, and the
time periods referred to in this Section 1.2 or Section 1.12 shall be extended
for an additional number of business days during which the rights to sell shares
were suspended.
(e) In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 1.2:
(i) After the Company has effected two registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective; or
(ii) During the period ending on a date six (6) months
after the effective date of a registration subject to Sections 1.2 or 1.3
hereof.
1.3. Company Registration. If (but without any obligation to do
--------------------
so) the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities which are
also being registered or covering only securities proposed to be issued in
exchange for securities or assets of another corporation or an SEC Rule 145
transaction), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 2.6, the Company shall, subject to the provisions of
Section 1.8, use its best efforts to cause to be registered under the Act all of
the Registrable Securities that each such Holder has requested to be registered.
In no event, however, shall any holder of registration rights be granted
registration rights under this Section 1.3 that are superior to the registration
rights of the Holders without the written consent of the holders of at least 50%
of the Registrable Securities.
1.4. Obligations of the Company. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder with
respect to a registration under Sections 1.2 and 1.12, keep such registration
statement effective for the period necessary (but, other than as provided below,
in no event more than nine (9) months) to complete the proposed public offering;
provided, however, that (i) such nine (9)-month period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, but for not
5
<PAGE>
more than a period of two (2) years, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor rule under the Act, permits an offering on a continuous or
delayed basis, and provided further that applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (i) includes any prospectus required by
Section 10(a)(3) of the Act or (ii) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (i) and (ii) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to (i) qualify to do business as a foreign corporation
or (ii) to file a general consent to service of process in any such states or
jurisdictions, unless the Company is already subject to service in such
jurisdiction, or (iii) register in any state requiring, as a condition to
registration, escrow or surrender of any Company securities.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing. If, in
such event, the Company advises the Holders of the Registrable Securities
covered by such registration statement that the Company considers it appropriate
for the registration statement to be amended, the Holders of such securities
shall suspend any further sales of their registered shares until the Company
advises them that the registration statement has been amended and the Company
has delivered revised prospectuses to the selling Holders (the selling Holders
shall promptly return to the Company all prior prospectuses). The time periods
referred to in this Section 1 shall be extended for an additional number of
business days during which the rights to sell shares was suspended.
6
<PAGE>
(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(i) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
1.5. Furnish Information. It shall be a condition precedent to
-------------------
the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
1.6. Expenses of Demand Registration. All expenses, other than
-------------------------------
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, and fees and disbursements of one counsel for the Holders
shall be borne by the Company; provided, however, that if a registration is
withdrawn at the request of the Holders requesting such registration (other than
as a result of information concerning a material adverse change to the business
or financial condition of the Company which is made known to the Holders after
the date on which such registration was requested) and if the requesting Holders
elect not to have such registration counted as a registration requested under
Section 1.2, the requesting Holders shall pay all of the expenses referred to
above of such registration pro rata in accordance with the number of their
Registrable Securities included in such registration in relation to the number
of shares of the Company and of others which were included in the registration.
1.7. Expenses of Company Registration. The Company shall bear and
--------------------------------
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
7
<PAGE>
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing and
qualification fees, printers and accounting fees and fees and disbursements of
one counsel for the Holders relating or apportionable thereto selected by them,
but excluding solely underwriting discounts and commissions relating to
Registrable Securities.
1.8. Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by shareholders to be
included in such offering exceeds the amount of securities sold that the
underwriters determine in their sole discretion is compatible with the success
of the offering, then the Company shall be required to include in the offering
only that number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the offering (the securities so included to be reduced, first, pro rata among
the holders of capital stock in their entirety, if necessary other than the
Holders; second, if necessary, the shares held by Garnick and the Viona
Employees pro rata; third, if necessary, among any other of the Holders other
than the holders of Class A Preferred Stock and Class B Preferred Stock; fourth,
if necessary, pro rata among the Holders of the Class A Preferred Stock and the
Class B Preferred Stock of the Company; next and lastly, if necessary, among the
Company's shares requested by the Company to be registered). For purposes of the
preceding parenthetical concerning apportionment, for any selling shareholder
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and shareholders of such holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling shareholder", and any pro-rata reduction with respect to such
"selling shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling shareholder," as defined in this sentence.
1.9. Delay of Registration. No Holder shall have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10. Indemnification. In the event any Registrable Securities
---------------
are included in a registration statement under this Section 1:
(a) The Company will indemnify and hold harmless each
Holder, any underwriter (as defined in the Act) for such Holder and each person,
if any, who controls such Holder or underwriter within the meaning of the Act or
the 1934 Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements,
8
<PAGE>
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, the 1934 Act
or any state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity obligations of the Company contained in this subsection 1.10(a) shall
not apply (x) to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), (y) in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person,
and (z) with respect to a Violation contained in or with respect to a
preliminary prospectus if a copy of the amended or supplemental preliminary
prospectus, or the final prospectus, shall have been delivered or sent to such
person within the time required by the Act, and the Violation was corrected in
such amended or supplemental preliminary prospectus or final prospectus.
(b) Each selling Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers, each person, if any,
who controls the Company within the meaning of the Act or the 1934 Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this subsection 1.10(b), in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement of the Company contained
in this subsection 1.10(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; and provided further, the total amount for which any Holder shall be
liable shall not in any event exceed the lesser of (A) aggregate net proceeds
received by such Holder from the sale of Registrable Securities held by such
Holder in such registration and (B) in the event that the underwriter shall
require joint and several liability of the selling Holders, that portion of
aggregate losses, claims, damages, liabilities or expenses indemnified against
as is equal to the proportion of the total number of Registrable Securities
being sold by such Holder to the total number of shares of Common Stock being
sold by the Company and all persons for which shares are registered in such
offering; and provided further, however, that no Holder shall be required to
9
<PAGE>
enter into an Underwriting Agreement that provides for any greater potential
liability than as set forth herein.
(c) Promptly after receipt by an indemnified party under
this Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties (the consent of the indemnified party to such
counsel not to be unreasonably withheld); provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section
1.10 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
10
<PAGE>
1.11. 1934 Act. With a view to making available to the Holders the
--------
benefits of Rule 144 promulgated under the Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration or pursuant to a registration on Form
S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12. Form S-3 Registration. In case the Company shall receive from
---------------------
any Holder or Holders holding at least fifty percent (50%) of the Registrable
Securities then outstanding a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders but in no event less than 25% of the originally issued Class B
Preferred Stock, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) effect, as soon as practicable, such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance,
11
<PAGE>
pursuant to this Section 1.12: (1) if Form S-3 is not available for such
offering by the Holders; (2) if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, the filing of such Form
S-3 Registration would (A) interfere with or affect the negotiation or
completion of any material transaction that is being contemplated by the Company
or (B) involve initial or continuing disclosure obligations materially adverse
to the best interests of the Company's shareholders, and it is therefore
essential to defer the filing of such registration statement, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than sixty (60) days after receipt of the
request of the Holder or Holders under this Section 1.12; provided, however,
that the Company shall not utilize this right more than once in any twelve (12)
month period; or (3) in any particular jurisdiction in which the Company would
be required to qualify to do business or to execute a general consent to service
of process in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.12, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
fees and disbursements of one counsel for the Holders, but excluding solely any
underwriters' discounts or commissions, shall be borne by the Company.
Registrations effected pursuant to this Section 1.12 shall not be counted as
demands for registration or registrations effected pursuant to Sections 1.2 or
1.3.
(d) The Company shall not be obligated to effect any
registration pursuant to this Section 1.12 if the Company delivers to the
Holders requesting registration under this Section 1.12 an opinion, in form and
substance acceptable to such Holders, of counsel satisfactory to such Holders,
that the Registrable Securities so requested to be registered may be sold or
transferred pursuant to Rule 144(k) under the Act.
1.13. Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned by a Holder to a transferee or assignee of such securities provided
that the Company is given a written notice at the time of or within a reasonable
time after such transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes the obligations of such
Holder under this Section 1.
1.14. Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of such holder's securities will not reduce the amount of the
Registrable Securities of the Holders which is included or (b) to make a demand
registration which could result in such registration statement
12
<PAGE>
being declared effective prior to the earlier of either of the dates set forth
in subsection 1.2(a) or within one hundred twenty (120) days of the effective
date of any registration effected pursuant to Section 1.2.
1.15. "Market Stand-Off" Agreement. Each Investor and Existing
----------------------------
Investor hereby agrees that, during the period of duration specified by the
Company and an underwriter of Common Stock or other securities of the Company,
following the effective date of a registration statement of the Company filed
under the Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except Common Stock included in such registration; provided, however, that:
(a) such agreement shall be applicable as to the period
immediately following the first such registration statement of the Company which
covers Common Stock to be sold on its behalf to the public in an underwritten
offering;
(b) all officers, directors and founders of the Company, all
then existing two percent or greater shareholders of the Company and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into similar agreements; and
(c) such market stand-off time period shall not exceed one
hundred eighty (180) days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor and Existing Investor (and the shares or securities of every other
person subject to the foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-l or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms which may be promulgated in the future.
1.16. 1934 Act. As promptly as possible following receipt of a
--------
written request therefor from the holders of 50% of the outstanding Registrable
Securities at any time while the Company either (a) is subject to periodic
reporting pursuant to Section 15(d) of the Exchange Act or (b) has 500 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the 1934 Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on the Nasdaq National Market,
as requested, and shall keep effective such registration and maintain such
listing or inclusion, and shall use its best efforts timely to file such
information, documents and reports as the Securities and Exchange Commission may
require or prescribe that the Company file in connection therewith. The Company
will, at the request of any holder of Registrable Securities, advise such holder
in writing as to whether all reports required to be filed by the Company under
Section 13 of the
13
<PAGE>
1934 Act during the 12 months preceding such request (or for such shorter period
as the Company was required to file such reports) have been filed, and any other
information which the holder may reasonably require in order to comply with Rule
144, or any other comparable rule, as then in effect.
2. Miscellaneous.
-------------
2.1. Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
2.2. Prior Agreement. Effective upon the execution and delivery of
---------------
this Agreement by all parties hereto, any and all registration rights granted to
the Existing Investors prior to the date hereof shall be terminated and shall be
of no further force and effect and shall be superseded and replaced by this
Agreement.
2.3. Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the Commonwealth of Pennsylvania .
2.4. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.5. Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.6. Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
2.7. Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
2.8. Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding; provided however that
no amendment or waiver that materially adversely affects the rights of the
holders
14
<PAGE>
of the Class A Preferred Stock or Class B Preferred Stock shall be made without
the consent of a majority of the class of securities so affected. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
2.9. Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
2.10. Aggregation of Stock. All shares of Registrable Securities held
--------------------
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
2.11. Entire Agreement. This Agreement constitutes the full and
----------------
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
[Remainder of this page intentionally left blank]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
QUADRANT INTERNATIONAL, INC.
By: /s/ Gregg Garnick
------------------------------------
Gregg Garnick
Chief Executive Officer
/s/ Gregg Garnick
-----------------------------------------
Gregg Garnick
NEPA VENTURE FUND, L.P.
By: NEPA II Management
Partners, L.P.,
its General Partner
By: NEPA Management Corporation,
its General Partner
/s/ Fred Beste
------------------------------------
Fred Beste, President
ATLANTIC COASTAL VENTURES, L.P.
By: Atlantic Coastal, L.P.,
its General Partner
By: /s/ Walter L. Threadgill
------------------------------------
Name:
Title: General Partner
LAMBROS, L.P.
By: Mercantile Trust Company N.A.,
as agent
By: /s/ C. Dennis Kemper
------------------------------------
C. Dennis Kemper
Senior Vice President
16
<PAGE>
ATI TECHNOLOGIES INC.
By: ____________________________________
Name:
Title:
/s/ John Akers
-----------------------------------------
John Akers
/s/ Samuel Frankel
-----------------------------------------
Samuel Frankel
/s/ James Collander
-----------------------------------------
James Collander
/s/ John Macomber
-----------------------------------------
John Macomber
/s/ William B. Macomber II
-----------------------------------------
William B. Macomber II
/s/ Elizabeth Macomber
-----------------------------------------
Elizabeth Macomber
/s/ Janet Macomber Williamson
-----------------------------------------
Janet Macomber Williamson
APA EXCELSIOR IV, L.P.
By: APA Excelsior IV Partners, L.P., its
General Partner
By: Patricof & Co. Managers, Inc.,
its General Partners
By: /s/ Robert Chefitz
----------------------------
Robert Chefitz
17
<PAGE>
Vice President
COUTTS & CO. (CAYMAN) LTD. Custodian for
APA Excelsior IV/Offshore
By: /s/ Robert Chefitz
-----------------------------------
Robert Chefitz
Managing Director
THE P/A FUND III, L.P.
By: APA Pennsylvania Parnters, L.P., its
General Partner
By: Patricof & Co. Managers, Inc., its
General Partners
By: /s/ Robert Chefitz
---------------------------
Robert Chefitz
Vice President
APAX GERMANY II, L.P.
By: /s/ Richard P. Rich
---------------------------------------
Name: Richard P. Rich
Title: Director
EXETER CAPITAL PARTNERS IV, L.P.
By: Exeter IV Advisor, L.P.
By: Exeter IV Advisor, Inc.
By: /s/ Keith R. Fox
---------------------------------------
Name:
Title:
/s/ Ulrich Sigmund
-------------------------------------------
Ulrich Sigmund
/s/ Hendrik Horak
-------------------------------------------
Hendrick Horak
18
<PAGE>
/s/ Jorg Ringelberg
-------------------------------------------
Jorg Ringelberg
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA Excelsior IV Partners, L.P., its
General Partner
By: Patricof & Co. Managers, Inc., its
General Partners
By: /s/ Robert Chefitz
------------------------------
Robert Chefitz
Vice President
19
<PAGE>
EXHIBIT 4.3
THIS WARRANT AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE;
ACCORDINGLY, NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER ARE
FREELY TRANSFERABLE AND NEITHER MAY BE SOLD, TRANSFERRED, OR ASSIGNED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, TRANSFER, OR
ASSIGNMENT.
QUADRANT INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
-----------------------------------------
PB NO. 3
ISSUED TO: PROGRESS CAPITAL, INC.
103 SPRINGER BUILDING
3411 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
NUMBER OF SHARES
TO BE ISSUED UPON
EXERCISE IN FULL: 75,000
PURCHASE PRICE
PER SHARE: $0.593
GROSS PURCHASE PRICE: $44,475
FOR VALUE RECEIVED, QUADRANT INTERNATIONAL, INC., a Pennsylvania
corporation (the "Company"), promises to issue to Progress Capital, Inc., a
Pennsylvania corporation, or any successor entity ("Progress"), seventy-five
thousand (75,000) fully paid and non-assessable shares of the Company's voting
common stock for the price of $0.593 per share (the "Purchase Price"). The
holder of this Warrant Certificate shall have the right to exercise the rights
provided for herein (such rights, with respect to each such share, is called
herein a "Warrant" and with respect to more than one share, is called herein
"Warrants"), whole or in part at any time or times until June in 26, 2004. The
number of shares of common stock purchasable upon exercise of the Warrants and
the Purchase Price shall be subject to adjustment from time to time as set forth
herein.
1. Definitions. For purposes of this Warrant Certificate:
-----------
(a) "Common Stock" shall mean, in addition to the classes of common
------------
stock now in existence, any and all other stock of any class which has the right
to participate in the
<PAGE>
distribution of earnings and assets of the Company without
limit as to amount or percentage. "Common Stock" shall not include any shares
at any time directly or indirectly owned by the Company.
(b) "Warrant" shall mean the right given under this Warrant
-------
Certificate to purchase one share of the Company's voting common stock.
(c) "Warrant Shares" shall mean the shares of the Company's voting
--------------
common stock purchased upon exercise of Warrants or which the holder hereof has
the right to purchase upon exercise of Warrants.
2. Exercise of Warrants.
--------------------
(a) Warrants may be exercised in whole or in part by the surrender of
this Warrant Certificate, properly endorsed, accompanied by written notice to
the Company by execution of the form of subscription attached hereto, at the
principal executive office of the Company and upon payment to the Company by
certified check or bank draft of the Purchase Price for the shares purchasable
thereunder. The persons entitled to the shares so purchased shall be treated for
all purposes as the holders of such shares as of the close of business on the
date of exercise. Certificates for the Warrant Shares so purchased together with
a new Warrant Certificate or Certificates of like tenor representing in the
aggregate the right to purchase the number of shares of the Company's common
stock with respect to which Warrants have not been exercised (each such Warrant
Certificate or Certificates to be for such portion of the total shares as the
holder thereof shall designate), shall be issued and delivered to the persons so
entitled within a reasonable time, not exceeding 15 days, after such exercise.
(b) Until such time as a Warrant is exercised in whole or in part, the
holder thereof shall have no rights as a shareholder of the Company except for
such rights as are expressly set forth herein.
3. Exchange. This Warrant Certificate is exchangeable, upon the surrender
--------
thereof by the holder thereof at any office of the Company, for a new Warrant
Certificate of like tenor representing in the aggregate the right to purchase
the number of shares of the Company's voting common stock purchasable under the
Warrant Certificate being exchanged, each such new Warrant Certificate to
represent the right to subscribe for and purchase such portion of the aggregate
number of shares of the Company's voting common stock represented by the Warrant
Certificate being exchanged as shall be designated by such holder at the time of
such surrender.
4. Transfer.
--------
(a) This Warrant Certificate and the Warrants are transferable, in
whole or in part, at the principal executive offices of the Company by the
Holder hereof in person or by duly authorized attorney, upon presentation of
this Warrant Certificate properly endorsed for transfer; provided, however that
-------- -------
this Warrant Certificate and the Warrants are only so transferable to a legal
successor of Progress or a corporate affiliate of Progress or Progress Bank.
(b) Progress acknowledges by acceptance of this Warrant Certificate
that the Warrant Shares may be sold only if the Warrant Shares are registered
under federal and state
2
<PAGE>
securities laws or if an exemption from registration is available. The Warrant
Shares presently are not so registered, and the Company is under no obligation
at any time to register them under federal or state securities laws, except as
expressly provided in this Warrant Certificate. Each certificate representing
Warrant Shares shall bear a legend substantially the same as the legend set
forth on the first page of this Warrant Certificate.
5. Certain Covenants of the Company. The Company covenants and agrees
--------------------------------
that all Warrant Shares will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and free from all taxes, liens, and charges with respect
to the issuance thereof provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than Progress; and, if any other
outstanding shares of Common Stock are then listed on a national or regional
securities exchange, will be so listed. The Common Stock is not presently listed
on any securities exchange and the Company is under no obligation to list it.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant Certificate may be exercised, the Company
shall, at all times, have authorized and reserved for the purpose of issuance
upon exercise of the purchase rights evidenced by this Warrant Certificate, a
sufficient number of shares of the Company's common stock to provide for the
then exercise of the rights represented by this Warrant Certificate.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Warrant Shares purchasable hereunder and the Purchase Price shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification (other than a change in par value or from par value to no par
value) or change of outstanding securities issuable upon exercise of this
Warrant Certificate, or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any such reclassification or change), the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefor, execute and deliver to each holder of
Warrants, a new Warrant Certificate, providing that the holder of such new
Warrant Certificate shall have the right to exercise such new Warrant
Certificate (upon terms no less favorable to the holder than those then
applicable to this Warrant Certificate) and procure upon such exercise in lieu
of each share of the Company's voting common stock theretofore issuable upon
exercise of the Warrants the kind and amount of shares of stock, other
securities, money or property (the "Consideration") receivable upon such
reclassification, change, consolidation, or merger, by the holder of one share
of the Company's voting common stock issuable upon exercise of the Warrants as
though this Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions of
this Section 6(a) shall similarly apply to successive reclassifications,
changes, consolidations or mergers. The Company shall use its best efforts to
give Progress no less than 30 days prior written notice of any reclassification,
change of outstanding securities, merger or consolidation described in this
Section 6(a).
3
<PAGE>
(b) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while any Warrants remain outstanding and unexpired, shall subdivide or combine
any of its Common Stock, the Purchase Price shall be proportionately reduced and
the number of Warrant Shares purchasable hereunder proportionately increased, in
the case of a subdivision of shares, or vice versa in the case of a combination
of shares, in either case as of the effective date of such subdivision or
combination.
(c) Certain Dividends and Distributions. If at any time while any
-----------------------------------
Warrants are outstanding and unexpired the Company shall:
(i) Pay a dividend payable in its Common Stock, or in rights to
acquire (by exercise, conversion or otherwise) its Common Stock, (in each case
other than where shares are being issued in lieu of cash), then the number of
Warrants shall be adjusted as of the date of such dividend, by multiplying the
number of Warrants represented by this Warrant Certificate immediately prior to
such date by a fraction (I) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend and (II) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend; or
(ii) Authorize a distribution of its assets to the holders of its
Common Stock as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law, the Company shall give notice thereof to the
holder of this Warrant Certificate at least 30 days prior to the record date for
determining entitlement to such distribution; and the holder of this Warrant
Certificate shall, upon exercise of the Warrants, be entitled to participate in
such distribution, without payment of any additional consideration therefor,
according to the number of shares of Common Stock held by such holder after the
exercise of the Warrants pro rata with all other holders of the Company's Common
Stock.
(d) Adjustment of Purchase Price. Upon each adjustment of the number
----------------------------
of shares of the Company's voting common stock purchasable hereunder, the
Purchase Price then in effect shall likewise be adjusted to that amount
determined by multiplying the Purchase Price then in effect by a fraction the
number of which is the number of shares of the Company's voting common stock
purchasable hereunder immediately prior to the adjustment and the denominator of
which is the number of shares of the Company's voting common stock purchasable
hereunder immediately after such adjustment.
(e) Other Action Affecting Common Stock. If any event occurs as to
-----------------------------------
which the other provisions of this Section 6 are not strictly applicable, or if
strictly applicable would not fairly protect the holder of Warrants against
dilution in accordance with the intent and principles of such Section 6, then
the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
anti-dilution rights as aforesaid.
7. Notice of Adjustments. In the event the Company shall take any action
---------------------
which pursuant to Section 6 results in an adjustment of the Purchase Price
and/or the number of Warrant Shares purchasable upon exercise of Warrants, the
Company will give to each holder of
4
<PAGE>
Warrants written notice of such action promptly following its effective date.
Such notice shall contain the Company's certificate signed by its President
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Company's Board of Directors
made any determination hereunder), and the Purchase Price and number of Warrant
Shares purchasable after giving effect to such adjustment. Failure to give any
notice required by this Warrant Certificate shall not effect the validity of any
action taken that triggers an adjustment under Section 6.
8. Participation Rights. Other than in connection with a public
--------------------
offering, if an unaffiliated third party makes an offer to the holders of more
than 50% of the outstanding shares of Common Stock of the Company (the "Offer")
to acquire, whether by purchase (including a merger or consolidation), tender or
exchange, in excess of 50% of the outstanding shares of Common Stock of the
Company on a fully diluted basis, which Offer such holders desire to accept, the
Company agrees to promptly forward a copy of the Offer to Progress. In such
event, the Company agrees not to effect any consolidation or merger to which it
would be a party and to use its best efforts to cause any such other transaction
with the shareholders not to be consummated, unless Progress shall have had a
period of at least ten days from the date it received a copy of the offer to
exercise this Warrant and participate in the transaction to the same extent, on
a pro rata basis, with the other shareholders of the Company. Progress
acknowledges that the rights granted hereunder have also been granted to other
security holders of the Company and understands that such rights may be junior
or pari passu with the rights of such other parties.
9. No Registration under Securities Act. Neither this Warrant Certificate
------------------------------------
nor the Warrant Shares have been registered under the Securities Act of 1933, as
amended (the "Act") or under the securities laws of any state. In issuing this
Warrant Certificate, the Company has relied upon the exemption from registration
provided by Section 4(2) of the Act for transactions by an issuer not involving
any public offering. The holder of this Warrant Certificate acknowledges by
acceptance of this Warrant Certificate that the sale of Warrants, or of any of
the Warrant Shares, under certain circumstances may be deemed to constitute a
distribution within the meaning of, and require registration under, the Act.
10. Subsequent Registration by Company of the Securities.
----------------------------------------------------
(a) As used herein, the term "Registrable Security" means each of the
shares of Common Stock issuable upon exercise of this Warrant and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
shares; provided, however, that Registerable Security shall not include any such
-------- -------
shares (i) disposed of pursuant to one or more registration statements under the
Act, (ii) which are saleable pursuant to Rule 144 under the Act or (iii) which
have otherwise been sold or transferred without registration under the Act.
(b) If the Company shall seek to register under the Act or qualify any
of its Common Stock (except in connection with or an acquisition, merger or
exchange of stock, to be registered on Forms S-4, S-8 or any successor forms
under the Act) and if the form of registration statement proposed to be used
otherwise may be used for the registration of the Registerable Securities, then,
on each such occasion, the Company shall furnish the holders of
5
<PAGE>
Registerable Securities (including the holders of Warrants exercisable for
Registrable Securities) with at least 30 days prior written notice thereof. At
the written request of any such holders, given within 20 days after the receipt
of such notice, and subject to the provisions of the Registration Rights
Agreement dated April 30, 1998 between the Company and several holders of its
securities (the "Registration Rights Agreement"), the Company will use its best
efforts to cause all of the Registerable Securities for which registration shall
have been so requested to be included in such registration statement. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering, and the managing underwriter determines and
advises in writing that the securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration, in the following order of priority: (i)
first, the securities the Company proposes to register (which triggers this
Section 10), whether for its own account or for the account of any of its
securityholders who have Registrable Securities under and as defined in the
Registration Rights Agreement; (ii) second, the Registrable Securities and the
securities of any other securityholders of the Company (including, but not
limited to, NEPA Venture Fund II, L.P. to the extent it exercises its piggyback
registration rights) with rights equal to those of the holders of Registrable
Securities, pro rata (based on the number of fully diluted shares of the Company
then owned by such holders), and (iii) third, other securities requested to be
included in such registration statement.
(c) All expenses in connection with the preparation and filing of any
registration statement under this Section 10, any registration or qualification
under securities or blue Sky laws of states in which the offering will be made
under such registration statement, and any filing fee of the National
Association of Securities Dealers, Inc. relating to such offering, shall be
borne in full by the Company, except for (i) any underwriter's or broker's
commissions applicable to the shares to be sold by the holders of Registerable
Securities, (ii) fees required to be paid by a selling shareholder rather than
the Company in order to comply with Blue Sky or state securities laws, (iii) all
fees or expenses expressly applicable to securities being sold by the holders of
Registrable Securities and (iv) fees or expenses of such holder's counsel.
(d) The Company shall indemnify and hold harmless selling holders of
Registrable Securities and, to the extent required in any agreement with any
underwriter or broker-dealer for whom the Registerable Securities may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Act) against all
losses, claims, damages, liabilities, expenses or actions in respect thereof
caused by any untrue statement of a material fact contained in any registration
statement under which such Registerable Securities were registered under the
Act, any preliminary or final prospectus contained therein, or any amendment or
supplement thereto (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registerable
Securities that are subject to a claimed right of indemnification) or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading (unless cured by an
amendment or supplement to the prospectus delivered to the selling holders prior
to the sales of the registerable securities that are subject to a claimed right
or indemnification); except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to the Company by the selling holders of
Registrable Securities expressly for use therein. In connection with any such
registration statement, the selling holders of Registrable
6
<PAGE>
Securities will furnish the Company in writing such information as the Company
may reasonably request for use in any such registration statement or prospectus
and they will, as a condition precedent to the Company's obligation hereunder,
agree to indemnify the Company, its directors and officers, and, to the extent
required in any agreement with any underwriter or broker-dealer, each such
underwriter or broker-dealer and each person, if any, who controls the Company
or any underwriter or broker-dealer (within the meaning of the Act) against any
loses, claims, damages, liabilities, statement of a material fact contained in
any such registration statement or prospectus or caused by any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein no misleading, insofar as such losses, claims, damages,
liabilities, expenses or actions are caused by any untrue statement or omission
based upon information furnished in writing to the Company by the selling
holders expressly for use therein.
(e) If a public offering is not completed within nine months after the
effective date of any registration statement filed by the Company pursuant to
Section 10(b), the Company reserves the right, in its option, to withdraw from
registration any securities offered by the Company which have not been sold
during such period.
(f) Notwithstanding the foregoing, the Company reserves the right to
delay such registration, or to withhold efforts to cause the registration
statement to become effective, if the Company determines in good faith that such
registration might (i) interfere with or affect the negotiation or completion of
any transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that might not be in the best
interest of the Company's shareholders. The selling holders of Registrable
Securities, upon receipt of notice from the Company that an event has occurred
which requires a post-effective amendment to any registration statement or
supplement to the prospectus included therein, shall promptly discontinue the
sale of their Registerable Securities until they receive a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(g) The Company shall have the right to grant any registration rights
or register any securities for the account of any person other than holders of
Registerable Securities regardless of whether such rights are senior,
subordinate or equal to those of the holders of Registerable Securities.
(h) In the case of any registration initiated under this Section 10,
the Company shall have the right to designate the managing underwriter in any
underwritten offering. The Company will supply the selling holders of
Registrable Securities with copies of such registration statements and of the
prospectus included therein in such quantities as may be reasonably necessary
for the purpose of the proposed disposition.
11. Sale of Warrant Shares Without Registration. The holder of this
-------------------------------------------
Warrant Certificate, by acceptance hereof, and the holder of any Warrant Shares,
by acceptance thereof, agrees to give written notice to Company of such holder's
intention before selling or otherwise disposing of the Warrant Shares, except to
the extent that such sale is pursuant to a then effective registration
statement. Such notice shall describe briefly the manner of any proposed sale or
other disposition to be made of Warrant Shares. Such notice shall be accompanied
by an opinion
7
<PAGE>
of counsel reasonably satisfactory to the Company stating that the proposed
exercise or sale or other disposition may be effected without registration or
qualification (under any federal or state law) of Warrant Shares. The Company,
as promptly as practicable, shall notify such holder if such opinion is
satisfactory, whereupon such holder shall be entitled to sell or otherwise
dispose of the Warrant Shares or to receive the certificates representing the
shares of Common Stock or to receive the certificates representing the Warrant
Shares and dispose of the shares so received, all in accordance with the terms
of the notice of intent delivered by such holder to the Company and in
accordance with all other applicable terms and conditions contained herein.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
--------------------------------------
reasonable evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of a Warrant Certificate and (in the case of loss,
theft, or destruction) of reasonable indemnity and (in the case of mutilation)
upon surrender and cancellation thereof, the Company will execute and deliver,
in lieu thereof, a new Warrant Certificate of like tenor.
13. Notices. All notices, requests and demands to or upon the Company
-------
and/or the holders of Warrants and/or Warrant Shares shall be deemed to have
been given or made when deposited in the mails, postage prepaid, registered or
certified mail, return receipt requested, or, in the case of telegraphic notice,
when delivered to the telegraph company, charges prepaid addressed as follows or
to such other address as may be hereafter designated in writing in accordance
herewith by the Company and/or the holder of Warrants and/or Warrant Shares.
The Company:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, Pennsylvania 19355
Attention: Mr. Jason Liu
With a copy to its
Counsel:
Cozen and O'Connor
Third Floor, Atrium Building
1900 Market Street
Philadelphia, Pennsylvania 19103
Attention: Michael J. Heller
Holders of Warrants
and/or Warrant Shares:
Progress Capital, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Steven D. Hobman
8
<PAGE>
With a copy to its
Counsel:
Buchanan Ingersoll, P.C.
Eleven Penn Center, 14th Floor
Philadelphia, PA 19103 - 2985
Attention: Nora Winkelman
14. Headings. The descriptive headings of the several sections of this
--------
Warrant Certificate are inserted for convenience only and do not constitute a
part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has
caused this Common Stock Purchase Warrant Certificate to be duly executed under
its corporate seal as of the 30th day of July, 1998.
QUADRANT INTERNATIONAL, INC.
Attest: /s/ Jason Liu By: /s/ Francis E. Wilde
_________________________ _________________________
Secretary Name:
Title:
9
<PAGE>
EXHIBIT 4.4
THIS WARRANT AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE;
ACCORDINGLY, NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER ARE
FREELY TRANSFERABLE AND NEITHER MAY BE SOLD, TRANSFERRED, OR ASSIGNED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, TRANSFER, OR
ASSIGNMENT.
QUADRANT INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
-----------------------------------------
PB NO. 4
ISSUED TO: PROGRESS CAPITAL, INC.
103 SPRINGER BUILDING
3411 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
NUMBER OF SHARES TO BE
ISSUED UPON EXERCISE IN FULL: 200,000
PURCHASE PRICE PER SHARE: $ 0.593
GROSS PURCHASE PRICE: $118,600
FOR VALUE RECEIVED, QUADRANT INTERNATIONAL, INC., a Pennsylvania
corporation (the "Company"), promises to issue to Progress Capital, Inc., a
Pennsylvania corporation, or any successor entity ("Progress"), two hundred
thousand (200,000) fully paid and non-assessable shares of the Company's voting
common stock for the price of $0.593 per share (the "Purchase Price"). The
holder of this Warrant Certificate shall have the right to exercise the rights
provided for herein (such rights, with respect to each such share, is called
herein a "Warrant" and with respect to more than one share, is called herein
"Warrants"), in whole or in part at any time or times until January 6, 2005.
The number of shares of common stock purchasable upon exercise of the Warrants
and the Purchase Price shall be subject to adjustment from time to time as set
forth herein.
1. Definitions. For purposes of this Warrant Certificate:
-----------
(a) "Common Stock" shall mean, in addition to the classes of common
------------
stock now in existence, any and all other stock of any class which has the right
to participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
<PAGE>
"Common Stock" shall not include any shares at any time directly or indirectly
owned by the Company.
(b) "Warrant" shall mean the right given under this Warrant
-------
Certificate to purchase one share of the Company's voting common stock.
(c) "Warrant Shares" shall mean the shares of the Company's voting
--------------
common stock purchased upon exercise of Warrants or which the holder hereof has
the right to purchase upon exercise of Warrants.
2. Exercise of Warrants.
--------------------
(a) Warrants may be exercised in whole or in part by the surrender of
this Warrant Certificate, properly endorsed, accompanied by written notice to
the Company by execution of the form of subscription attached hereto, at the
principal executive office of the Company and upon payment to the Company by
certified check or bank draft of the Purchase Price for the shares purchasable
thereunder. The persons entitled to the shares so purchased shall be treated
for all purposes as the holders of such shares as of the close of business on
the date of exercise. Certificates for the Warrant Shares so purchased together
with a new Warrant Certificate or Certificates of like tenor representing in the
aggregate the right to purchase the number of shares of the Company's common
stock with respect to which Warrants have not been exercised (each such warrant
Certificate or Certificates to be for such portion of the total shares as the
holder thereof shall designate), shall be issued and delivered to the persons so
entitled within a reasonable time, not exceeding 15 days, after such exercise.
(b) Until such time as a Warrant is exercised in whole or in part,
the holder thereof shall have no rights as a shareholder of the Company except
for such rights as are expressly set forth herein.
3. Exchange. This Warrant Certificate is exchangeable, upon the
--------
surrender thereof by the holder thereof at any office of the Company, for a new
Warrant Certificate of like tenor representing in the aggregate the right to
purchase the number of shares of the Company's voting common stock purchasable
under the Warrant Certificate being exchanged, each such new Warrant Certificate
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of the Company's voting common stock represented by
the Warrant Certificate being exchanged as shall be designated by such holder at
the time of such surrender.
4. Transfer.
--------
(a) This Warrant Certificate and the Warrants are transferable, in
whole or in part, at the principal executive offices of the Company by the
Holder hereof in person or by duly authorized attorney, upon presentation of
this Warrant Certificate properly endorsed for transfer; provided, however that
-------- -------
this Warrant Certificate and the Warrants are only so transferable to a legal
successor of Progress or a corporate affiliate of Progress or Progress Bank.
(b) Progress acknowledges by acceptance of this Warrant Certificate
that the Warrant Shares may be sold only if the Warrant Shares are registered
under federal and state securities laws or if an exemption from registration is
available. The Warrant Shares presently
2
<PAGE>
are not so registered, and the Company is under no obligation at any time to
register them under federal or state securities laws, except as expressly
provided in this Warrant Certificate. Each certificate representing Warrant
Shares shall bear a legend substantially the same as the legend set forth on the
first page of this Warrant Certificate.
5. Certain Covenants of the Company. The Company covenants and agrees
--------------------------------
that all Warrant Shares will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and free from all taxes, liens, and charges with respect
to the issuance thereof provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than Progress; and, if any other
outstanding shares of Common Stock are then listed on a national or regional
securities exchange, will be so listed. The Common Stock is not presently
listed on any securities exchange and the Company is under no obligation to list
it. The Company further covenants and agrees that during the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company shall, at all times, have authorized and reserved for the purpose of
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of shares of the Company's common stock to
provide for the then exercise of the rights represented by this Warrant
Certificate.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Warrant Shares purchasable hereunder and the Purchase Price shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification (other than a change in par value or from par value to no par
value) or change of outstanding securities issuable upon exercise of this
Warrant Certificate, or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any such reclassification or change), the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefor, execute and deliver to each holder of
Warrants, a new Warrant Certificate, providing that the holder of such new
Warrant Certificate shall have the right to exercise such new Warrant
Certificate (upon terms no less favorable to the holder than those then
applicable to this Warrant Certificate) and procure upon such exercise in lieu
of each share of the Company's voting common stock theretofore issuable upon
exercise of the Warrants the kind and amount of shares of stock, other
securities, money or property (the "Consideration") receivable upon such
reclassification, change, consolidation, or merger, by the holder of one share
of the Company's voting common stock issuable upon exercise of the Warrants as
though this Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions of
this Section 6(a) shall similarly apply to successive reclassifications,
changes, consolidations or mergers. The Company shall use its best efforts to
give Progress no less than 30 days prior written notice of any reclassification,
change of outstanding securities, merger or consolidation described in this
Section 6(a).
3
<PAGE>
(b) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while any Warrants remain outstanding and unexpired, shall subdivide or combine
any of its Common Stock, the Purchase Price shall be proportionately reduced and
the number of Warrant Shares Purchasable hereunder proportionately increased, in
the case of a subdivision of shares, or vice versa in the case of a combination
of shares, in either case as of the effective date of such subdivision or
combination.
(c) Certain Dividends and Distributions. If at any time while any
-----------------------------------
Warrants are outstanding and unexpired the Company shall:
(i) Pay a dividend payable in its Common Stock, or in rights to
acquire (by exercise, conversion or otherwise) its Common Stock, (in each case
other than where shares are being issued in lieu of cash), then the number of
Warrants shall be adjusted as of the date of such dividend, by multiplying the
number of Warrants represented by this Warrant Certificate immediately prior to
such date by a fraction (I) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend and (II) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend; or
(ii) Authorize a distribution of its assets to the holders of its
Common Stock as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law, the Company shall give notice thereof to the
holder of this Warrant Certificate at least 30 days prior to the record date for
determining entitlement to such distribution; and the holder of this Warrant
Certificate shall, upon exercise of the Warrants, be entitled to participate in
such distribution, without payment of any additional consideration therefor,
according to the number of shares of Common Stock held by such holder after the
exercise of the Warrants pro rata with all other holders of the Company's Common
Stock.
(d) Adjustment of Purchase Price. Upon each adjustment of the number
-----------------------------
of shares of the Company's voting common stock purchasable hereunder, the
Purchase Price then in effect shall likewise be adjusted to that amount
determined by multiplying the Purchase Price then in effect by a fraction the
number of which is the number of shares of the Company's voting common stock
purchasable hereunder immediately prior to the adjustment and the denominator of
which is the number of shares of the Company's voting common stock purchasable
hereunder immediately after such adjustment.
(e) Other Action Affecting Common Stock. If any event occurs as to
-----------------------------------
which the other provisions of this Section 6 are not strictly applicable, or if
strictly applicable would not fairly protect the holder of Warrants against
dilution in accordance with the intent and principles of such Section 6, then
the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
anti-dilution rights as aforesaid.
7. Notice of Adjustments. In the event the Company shall take any action
---------------------
which pursuant to Section 6 results in an adjustment of the Purchase Price
and/or the number of Warrant Shares purchasable upon exercise of Warrants, the
Company will give to each holder of
4
<PAGE>
Warrants written notice of such action promptly following its effective date.
Such notice shall contain the Company's certificate signed by its President
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Company's Board of Directors
made any determination hereunder), and the Purchase Price and number of Warrant
Shares purchasable after giving effect to such adjustment. Failure to give any
notice required by this Warrant Certificate shall not effect the validity of any
action taken that triggers an adjustment under Section 6.
8. Participation Rights. Other than in connection with a public
--------------------
offering, if an unaffiliated third party makes an offer to the holders of more
than 50% of the outstanding shares of Common Stock of the Company (the "Offer")
to acquire, whether by purchase (including a merger or consolidation), tender or
exchange, in excess of 50% of the outstanding shares of Common Stock of the
Company on a fully diluted basis, which offer such holders desire to accept, the
Company agrees to promptly forward a copy of the Offer to Progress. In such
event, the Company agrees not to effect any consolidation or merger to which it
would be a party and to use its best efforts to cause any such other transaction
with the shareholders not to be consummated, unless Progress shall have had a
period of at least ten days from the date it received a copy of the offer to
exercise this Warrant and participate in the transaction to the same extent, on
a pro rata basis, with the other shareholders of the Company. Progress
acknowledges that the rights granted hereunder have also been granted to other
security holders of the Company and understands that such rights may be junior
or pari passu with the rights of such other parties.
9. No Registration under Securities Act. Neither this Warrant
------------------------------------
Certificate nor the Warrant Shares have been registered under the Securities Act
of 1933, as amended (the "Act") or under the securities laws of any state. In
issuing this Warrant Certificate, the Company has relied upon the exemption from
registration provided by Section 4(2) of the Act for transactions by an issuer
not involving any public offering. The holder of this Warrant Certificate
acknowledges by acceptance of this Warrant Certificate that the sale of
Warrants, or of any of the Warrant Shares, under certain circumstances may be
deemed to constitute a distribution within the meaning of, and require
registration under, the Act.
10. Subsequent Registration by Company of the Securities.
----------------------------------------------------
(a) As used herein, the term "Registrable Security" means each of the
shares of Common Stock issuable upon exercise of this Warrant and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
shares; provided, however, that Registerable Security shall not include any such
-------- -------
shares (i) disposed of pursuant to one or more registration statements under the
Act, (ii) which are saleable pursuant to Rule 144 under the Act or (iii) which
have otherwise been sold or transferred without registration under the Act.
(b) If the Company shall seek to register under the Act or qualify
any of its Common Stock (except in connection with or an acquisition, merger or
exchange of stock, to be registered on Forms S-4, S-8 or any successor forms
under the Act) and if the form of registration statement proposed to be used
otherwise may be used for the registration of the Registerable Securities, then,
on each such occasion, the Company shall furnish the holders of
5
<PAGE>
Registerable Securities (including the holders of Warrants exercisable for
Registrable Securities) with at least 30 days prior written notice thereof. At
the written request of any such holders, given within 20 days after the receipt
of such notice, and subject to the provisions of the Registration Rights
Agreement dated April 30, 1998 between the Company and several holders of its
securities (the "Registration Rights Agreement"), the Company will use its best
efforts to cause all of the Registerable Securities for which registration shall
have been so requested to be included in such registration statement. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering, and the managing underwriter determines and
advises in writing that the securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration, in the following order of priority: (i)
first, the securities the Company proposes to register (which triggers this
Section 10), whether for its own account or for the account of any of its
securityholders who have Registrable Securities under and as defined in the
Registration Rights Agreement; (ii) second, the Registrable Securities and the
securities of any other securityholders of the Company (including, but not
limited to, NEPA Venture Fund II, L.P. to the extent it exercises its piggyback
registration rights) with rights equal to those of the holders of Registrable
Securities, pro rata (based on the number of fully diluted shares of the Company
then owned by such holders), and (iii) third, other securities requested to be
included in such registration statement.
(c) All expenses in connection with the preparation and filing of any
registration statement under this Section 10, any registration or qualification
under securities or blue Sky laws of states in which the offering will be made
under such registration statement, and any filing fee of the National
Association of Securities Dealers, Inc. relating to such offering, shall be
borne in full by the Company, except for (i) any underwriter's or broker's
commissions applicable to the shares to be sold by the holders of Registerable
Securities, (ii) fees required to be paid by a selling shareholder rather than
the Company in order to comply with Blue Sky or state securities laws, (iii) all
fees or expenses expressly applicable to securities being sold by the holders of
Registrable Securities and (iv) fees or expenses of such holder's counsel.
(d) The Company shall indemnify and hold harmless selling holders of
Registrable Securities and, to the extent required in any agreement with any
underwriter or broker-dealer for whom the Registerable Securities may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Act) against all
losses, claims, damages, liabilities, expenses or actions in respect thereof
caused by any untrue statement of a material fact contained in any registration
statement under which such Registerable Securities were registered under the
Act, any preliminary or final prospectus contained therein, or any amendment or
supplement thereto (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registerable
Securities that are subject to a claimed right of indemnification) or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading (unless cured by an
amendment or supplement to the prospectus delivered to the selling holders prior
to the sales of the registerable securities that are subject to a claimed right
or indemnification); except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to the Company by the selling holders of
Registrable Securities expressly for use therein. In connection with any such
registration statement, the selling holders of Registrable
6
<PAGE>
Securities will furnish the Company in writing such information as the Company
may reasonably request for use in any such registration statement or prospectus
and they will, as a condition precedent to the Company's obligation hereunder,
agree to indemnify the Company, its directors and officers, and, to the extent
required in any agreement with any underwriter or broker-dealer, each such
underwriter or broker-dealer and each person, if any, who controls the Company
or any underwriter or broker-dealer (within the meaning of the Act) against any
loses, claims, damages, liabilities, statement of a material fact contained in
any such registration statement or prospectus or caused by any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein no misleading, insofar as such losses, claims, damages,
liabilities, expenses or actions are caused by any untrue statement or omission
based upon information furnished in writing to the Company by the selling
holders expressly for use therein.
(e) If a public offering is not completed within nine months after
the effective date of any registration statement filed by the Company pursuant
to Section 10(b), the Company reserves the right, in its option, to withdraw
from registration any securities offered by the Company which have not been sold
during such period.
(f) Notwithstanding the foregoing, the Company reserves the right to
delay such registration, or to withhold efforts to cause the registration
statement to become effective, if the Company determines in good faith that such
registration might (i) interfere with or affect the negotiation or completion of
any transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that might not be in the best
interest of the Company's shareholders. The selling holders of Registrable
Securities, upon receipt of notice from the Company that an event has occurred
which requires a post-effective amendment to any registration statement or
supplement to the prospectus included therein, shall promptly discontinue the
sale of their Registerable Securities until they receive a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(g) The Company shall have the right to grant any registration rights
or register any securities for the account of any person other than holders of
Registerable Securities regardless of whether such rights are senior,
subordinate or equal to those of the holders of Registerable Securities.
(h) In the case of any registration initiated under this Section 10,
the Company shall have the right to designate the managing underwriter in any
underwritten offering. The Company will supply the selling holders of
Registrable Securities with copies of such registration statements and of the
prospectus included therein in such quantities as may be reasonably necessary
for the purpose of the proposed disposition.
11. Sale of Warrant Shares Without Registration. The holder of this
-------------------------------------------
Warrant Certificate, by acceptance hereof, and the holder of any Warrant Shares,
by acceptance thereof, agrees to give written notice to Company of such holder's
intention before selling or otherwise disposing of the Warrant Shares, except to
the extent that such sale is pursuant to a then effective registration
statement. Such notice shall describe briefly the manner of any proposed sale
or other disposition to be made of Warrant Shares. Such notice shall be
accompanied by an opinion
7
<PAGE>
of counsel reasonably satisfactory to the Company stating that the proposed
exercise or sale or other disposition may be effected without registration or
qualification (under any federal or state law) of Warrant Shares. The Company,
as promptly as practicable, shall notify such holder if such opinion is
satisfactory, whereupon such holder shall be entitled to sell or otherwise
dispose of the Warrant Shares or to receive the certificates representing the
shares of Common Stock or to receive the certificates representing the Warrant
Shares and dispose of the shares so received, all in accordance with the terms
of the notice of intent delivered by such holder to the Company and in
accordance with all other applicable terms and conditions contained herein.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
--------------------------------------
of reasonable evidence satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of a Warrant Certificate and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
13. Notices. All notices, requests and demands to or upon the Company
-------
and/or the holders of Warrants and/or Warrant Shares shall be deemed to have
been given or made when deposited in the mails, postage prepaid, registered or
certified mail, return receipt requested, or, in the case of telegraphic notice,
when delivered to the telegraph company, charges prepaid addressed as follows or
to such other address as may be hereafter designated in writing in accordance
herewith by the Company and/or the holder of Warrants and/or Warrant Shares.
The Company:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, Pennsylvania 19355
Attention: Mr. Jason Liu
With a copy to its
Counsel:
Cozen and O'Connor
Third Floor, Atrium Building
1900 Market Street
Philadelphia, Pennsylvania 19103
Attention: Michael J. Heller
Holders of Warrants
and/or Warrant Shares:
Progress Capital, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Steven D. Hobman
8
<PAGE>
With a copy to its
Counsel:
Buchanan Ingersoll, P.C.
Eleven Penn Center, 14th Floor
Philadelphia, PA 19103 - 2985
Attention: Nora Winkelman
14. Headings. The descriptive headings of the several sections of this
--------
Warrant Certificate are inserted for convenience only and do not constitute a
part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has
caused this Common Stock Purchase Warrant Certificate to be duly executed under
its corporate seal as of the 30th day of July, 1998.
QUADRANT INTERNATIONAL, INC.
Attest: /s/ Jason Liu By: /s/ Francis E. Wilde
--------------------------- ------------------------------
Secretary Name:
Title:
9
<PAGE>
EXHIBIT 4.5
THIS WARRANT AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE;
ACCORDINGLY, NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER ARE
FREELY TRANSFERABLE AND NEITHER MAY BE SOLD, TRANSFERRED, OR ASSIGNED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, TRANSFER, OR
ASSIGNMENT.
QUADRANT INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
-----------------------------------------
PB NO. 5
ISSUED TO: PROGRESS CAPITAL, INC.
103 SPRINGER BUILDING
3411 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
NUMBER OF SHARES TO BE
ISSUED UPON EXERCISE IN FULL: 100,000
PURCHASE PRICE PER SHARE: $ 0.593
GROSS PURCHASE PRICE: $ 59,300
FOR VALUE RECEIVED, QUADRANT INTERNATIONAL, INC., a Pennsylvania
corporation (the "Company"), promises to issue to Progress Capital, Inc., a
Pennsylvania corporation, or any successor entity ("Progress"), two hundred
thousand (200,000) fully paid and non-assessable shares of the Company's voting
common stock for the price of $0.593 per share (the "Purchase Price"). The
holder of this Warrant Certificate shall have the right to exercise the rights
provided for herein (such rights, with respect to each such share, is called
herein a "Warrant" and with respect to more than one share, is called herein
"Warrants"), in whole or in part at any time or times until seven (7) years
after the date hereof (as set forth on the signature page hereof). The number
of shares of common stock purchasable upon exercise of the Warrants and the
Purchase Price shall be subject to adjustment from time to time as set forth
herein.
1. Definitions. For purposes of this Warrant Certificate:
-----------
(a) "Common Stock" shall mean, in addition to the classes of common
------------
stock now in existence, any and all other stock of any class which has the right
to participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
<PAGE>
"Common Stock" shall not include any shares at any time directly or indirectly
owned by the Company.
(b) "Warrant" shall mean the right given under this Warrant
-------
Certificate to purchase one share of the Company's voting common stock.
(c) "Warrant Shares" shall mean the shares of the Company's voting
--------------
common stock purchased upon exercise of Warrants or which the holder hereof has
the right to purchase upon exercise of Warrants.
2. Exercise of Warrants.
--------------------
(a) Warrants may be exercised in whole or in part by the surrender of
this Warrant Certificate, properly endorsed, accompanied by written notice to
the Company by execution of the form of subscription attached hereto, at the
principal executive office of the Company and upon payment to the Company by
certified check or bank draft of the Purchase Price for the shares purchasable
thereunder. The persons entitled to the shares so purchased shall be treated
for all purposes as the holders of such shares as of the close of business on
the date of exercise. Certificates for the Warrant Shares so purchased together
with a new Warrant Certificate or Certificates of like tenor representing in the
aggregate the right to purchase the number of shares of the Company's common
stock with respect to which Warrants have not been exercised (each such Warrant
Certificate or Certificates to be for such portion of the total shares as the
holder thereof shall designate), shall be issued and delivered to the persons so
entitled within a reasonable time, not exceeding 15 days, after such exercise.
(b) Until such time as a Warrant is exercised in whole or in part,
the holder thereof shall have no rights as a shareholder of the Company except
for such rights as are expressly set forth herein.
3. Exchange. This Warrant Certificate is exchangeable, upon the
--------
surrender thereof by the holder thereof at any office of the Company, for a new
Warrant Certificate of like tenor representing in the aggregate the right to
purchase the number of shares of the Company's voting common stock purchasable
under the Warrant Certificate being exchanged, each such new Warrant Certificate
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of the Company's voting common stock represented by
the Warrant Certificate being exchanged as shall be designated by such holder at
the time of such surrender.
4. Transfer.
--------
(a) This Warrant Certificate and the Warrants are transferable, in
whole or in part, at the principal executive offices of the Company by the
Holder hereof in person or by duly authorized attorney, upon presentation of
this Warrant Certificate properly endorsed for transfer; provided, however that
-------- -------
this Warrant Certificate and the Warrants are only so transferable to a legal
successor of Progress or a corporate affiliate of Progress or Progress Bank.
(b) Progress acknowledges by acceptance of this Warrant Certificate
that the Warrant Shares may be sold only if the Warrant Shares are registered
under federal and state securities laws or if an exemption from registration is
available. The Warrant Shares presently
2
<PAGE>
are not so registered, and the Company is under no obligation at any time to
register them under federal or state securities laws, except as expressly
provided in this Warrant Certificate. Each certificate representing Warrant
Shares shall bear a legend substantially the same as the legend set forth on the
first page of this Warrant Certificate.
5. Certain Covenants of the Company. The Company covenants and agrees
--------------------------------
that all Warrant Shares will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and free from all taxes, liens, and charges with respect
to the issuance thereof provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than Progress; and, if any other
outstanding shares of Common Stock are then listed on a national or regional
securities exchange, will be so listed. The Common Stock is not presently
listed on any securities exchange and the Company is under no obligation to list
it. The Company further covenants and agrees that during the period within
which the rights represented by this Warrant Certificate may be exercised, the
Company shall, at all times, have authorized and reserved for the purpose of
issuance upon exercise of the purchase rights evidenced by this Warrant
Certificate, a sufficient number of shares of the Company's common stock to
provide for the then exercise of the rights represented by this Warrant
Certificate.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Warrant Shares purchasable hereunder and the Purchase Price shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification (other than a change in par value or from par value to no par
value) or change of outstanding securities issuable upon exercise of this
Warrant Certificate, or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any such reclassification or change), the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefor, execute and deliver to each holder of
Warrants, a new Warrant Certificate, providing that the holder of such new
Warrant Certificate shall have the right to exercise such new Warrant
Certificate (upon terms no less favorable to the holder than those then
applicable to this Warrant Certificate) and procure upon such exercise in lieu
of each share of the Company's voting common stock theretofore issuable upon
exercise of the Warrants the kind and amount of shares of stock, other
securities, money or property (the "Consideration") receivable upon such
reclassification, change, consolidation, or merger, by the holder of one share
of the Company's voting common stock issuable upon exercise of the Warrants as
though this Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions of
this Section 6(a) shall similarly apply to successive reclassifications,
changes, consolidations or mergers. The Company shall use its best efforts to
give Progress no less than 30 days prior written notice of any reclassification,
change of outstanding securities, merger or consolidation described in this
Section 6(a).
3
<PAGE>
(b) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while any Warrants remain outstanding and unexpired, shall subdivide or combine
any of its Common Stock, the Purchase Price shall be proportionately reduced and
the number of Warrant Shares purchasable hereunder proportionately increased, in
the case of a subdivision of shares, or vice versa in the case of a combination
of shares, in either case as of the effective date of such subdivision or
combination.
(c) Certain Dividends and Distributions. If at any time while any
-----------------------------------
Warrants are outstanding and unexpired the Company shall:
(i) Pay a dividend payable in its Common Stock, or in rights to
acquire (by exercise, conversion or otherwise) its Common Stock, (in each case
other than where shares are being issued in lieu of cash), then the number of
Warrants shall be adjusted as of the date of such dividend, by multiplying the
number of Warrants represented by this Warrant Certificate immediately prior to
such date by a fraction (I) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend and (II) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend; or
(ii) Authorize a distribution of its assets to the holders of its
Common Stock as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law, the Company shall give notice thereof to the
holder of this Warrant Certificate at least 30 days prior to the record date for
determining entitlement to such distribution; and the holder of this Warrant
Certificate shall, upon exercise of the Warrants, be entitled to participate in
such distribution, without payment of any additional consideration therefor,
according to the number of shares of Common Stock held by such holder after the
exercise of the Warrants pro rata with all other holders of the Company's Common
Stock.
(d) Adjustment of Purchase Price. Upon each adjustment of the number
----------------------------
of shares of the Company's voting common stock purchasable hereunder, the
Purchase Price then in effect shall likewise be adjusted to that amount
determined by multiplying the Purchase Price then in effect by a fraction the
number of which is the number of shares of the Company's voting common stock
purchasable hereunder immediately prior to the adjustment and the denominator of
which is the number of shares of the Company's voting common stock purchasable
hereunder immediately after such adjustment.
(e) Other Action Affecting Common Stock. If any event occurs as to
-----------------------------------
which the other provisions of this Section 6 are not strictly applicable, or if
strictly applicable would not fairly protect the holder of Warrants against
dilution in accordance with the intent and principles of such Section 6, then
the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
anti-dilution rights as aforesaid.
7. Notice of Adjustments. In the event the Company shall take any action
---------------------
which pursuant to Section 6 results in an adjustment of the Purchase Price
and/or the number of Warrant Shares purchasable upon exercise of Warrants, the
Company will give to each holder of
4
<PAGE>
Warrants written notice of such action promptly following its effective date.
Such notice shall contain the Company's certificate signed by its President
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Company's Board of Directors
made any determination hereunder), and the Purchase Price and number of Warrant
Shares purchasable after giving effect to such adjustment. Failure to give any
notice required by this Warrant Certificate shall not effect the validity of any
action taken that triggers an adjustment under Section 6.
8. Participation Rights. Other than in connection with a public
--------------------
offering, if an unaffiliated third party makes an offer to the holders of more
than 50% of the outstanding shares of Common Stock of the Company (the "Offer")
to acquire, whether by purchase (including a merger or consolidation), tender or
exchange, in excess of 50% of the outstanding shares of Common Stock of the
Company on a fully diluted basis, which Offer such holders desire to accept, the
Company agrees to promptly forward a copy of the Offer to Progress. In such
event, the Company agrees not to effect any consolidation or merger to which it
would be a party and to use its best efforts to cause any such other transaction
with the shareholders not to be consummated, unless Progress shall have had a
period of at least ten days from the date it received a copy of the Offer to
exercise this Warrant and participate in the transaction to the same extent, on
a pro rata basis, with the other shareholders of the Company. Progress
acknowledges that the rights granted hereunder have also been granted to other
security holders of the Company and understands that such rights may be junior
or pari passu with the rights of such other parties.
9. No Registration under Securities Act. Neither this Warrant
------------------------------------
Certificate nor the Warrant Shares have been registered under the Securities Act
of 1933, as amended (the "Act") or under the securities laws of any state. In
issuing this Warrant Certificate, the Company has relied upon the exemption from
registration provided by Section 4(2) of the Act for transactions by an issuer
not involving any public offering. The holder of this Warrant Certificate
acknowledges by acceptance of this Warrant Certificate that the sale of
Warrants, or of any of the Warrant Shares, under certain circumstances may be
deemed to constitute a distribution within the meaning of, and require
registration under, the Act.
10. Subsequent Registration by Company of the Securities.
----------------------------------------------------
(a) As used herein, the term "Registrable Security" means each of the
shares of Common Stock issuable upon exercise of this Warrant and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
shares; provided, however, that Registerable Security shall not include any such
-------- -------
shares (i) disposed of pursuant to one or more registration statements under the
Act, (ii) which are saleable pursuant to Rule 144 under the Act or (iii) which
have otherwise been sold or transferred without registration under the Act.
(b) If the Company shall seek to register under the Act or qualify
any of its Common Stock (except in connection with or an acquisition, merger or
exchange of stock, to be registered on Forms S-4, S-8 or any successor forms
under the Act) and if the form of registration statement proposed to be used
otherwise may be used for the registration of the Registerable Securities, then,
on each such occasion, the Company shall furnish the holders of
5
<PAGE>
Registerable Securities (including the holders of Warrants exercisable for
Registrable Securities) with at least 30 days prior written notice thereof. At
the written request of any such holders, given within 20 days after the receipt
of such notice, and subject to the provisions of the Registration Rights
Agreement dated April 30, 1998 between the Company and several holders of its
securities (the "Registration Rights Agreement"), the Company will use its best
efforts to cause all of the Registerable Securities for which registration shall
have been so requested to be included in such registration statement. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering, and the managing underwriter determines and
advises in writing that the securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration, in the following order of priority: (i)
first, the securities the Company proposes to register (which triggers this
Section 10), whether for its own account or for the account of any of its
securityholders who have Registrable Securities under and as defined in the
Registration Rights Agreement; (ii) second, the Registrable Securities and the
securities of any other securityholders of the Company (including, but not
limited to, NEPA Venture Fund II, L.P. to the extent it exercises its piggyback
registration rights) with rights equal to those of the holders of Registrable
Securities, pro rata (based on the number of fully diluted shares of the Company
then owned by such holders), and (iii) third, other securities requested to be
included in such registration statement.
(c) All expenses in connection with the preparation and filing of any
registration statement under this Section 10, any registration or qualification
under securities or blue Sky laws of states in which the offering will be made
under such registration statement, and any filing fee of the National
Association of Securities Dealers, Inc. relating to such offering, shall be
borne in full by the Company, except for (i) any underwriter's or broker's
commissions applicable to the shares to be sold by the holders of Registerable
Securities, (ii) fees required to be paid by a selling shareholder rather than
the Company in order to comply with Blue Sky or state securities laws, (iii) all
fees or expenses expressly applicable to securities being sold by the holders of
Registrable Securities and (iv) fees or expenses of such holder's counsel.
(d) The Company shall indemnify and hold harmless selling holders of
Registrable Securities and, to the extent required in any agreement with any
underwriter or broker-dealer for whom the Registerable Securities may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Act) against all
losses, claims, damages, liabilities, expenses or actions in respect thereof
caused by any untrue statement of a material fact contained in any registration
statement under which such Registerable Securities were registered under the
Act, any preliminary or final prospectus contained therein, or any amendment or
supplement thereto (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registerable
Securities that are subject to a claimed right of indemnification) or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading (unless cured by an
amendment or supplement to the prospectus delivered to the selling holders prior
to the sales of the registerable securities that are subject to a claimed right
or indemnification); except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to the Company by the selling holders of
Registrable Securities expressly for use therein. In connection with any such
registration statement, the selling holders of Registrable
6
<PAGE>
Securities will furnish the Company in writing such information as the Company
may reasonably request for use in any such registration statement or prospectus
and they will, as a condition precedent to the Company's obligation hereunder,
agree to indemnify the Company, its directors and officers, and, to the extent
required in any agreement with any underwriter or broker-dealer, each such
underwriter or broker-dealer and each person, if any, who controls the Company
or any underwriter or broker-dealer (within the meaning of the Act) against any
loses, claims, damages, liabilities, statement of a material fact contained in
any such registration statement or prospectus or caused by any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein no misleading, insofar as such losses, claims, damages,
liabilities, expenses or actions are caused by any untrue statement or omission
based upon information furnished in writing to the Company by the selling
holders expressly for use therein.
(e) If a public offering is not completed within nine months after
the effective date of any registration statement filed by the Company pursuant
to Section 10(b), the Company reserves the right, in its option, to withdraw
from registration any securities offered by the Company which have not been sold
during such period.
(f) Notwithstanding the foregoing, the Company reserves the right to
delay such registration, or to withhold efforts to cause the registration
statement to become effective, if the Company determines in good faith that such
registration might (i) interfere with or affect the negotiation or completion of
any transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that might not be in the best
interest of the Company's shareholders. The selling holders of Registrable
Securities, upon receipt of notice from the Company that an event has occurred
which requires a post-effective amendment to any registration statement or
supplement to the prospectus included therein, shall promptly discontinue the
sale of their Registerable Securities until they receive a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(g) The Company shall have the right to grant any registration rights
or register any securities for the account of any person other than holders of
Registerable Securities regardless of whether such rights are senior,
subordinate or equal to those of the holders of Registerable Securities.
(h) In the case of any registration initiated under this Section 10,
the Company shall have the right to designate the managing underwriter in any
underwritten offering. The Company will supply the selling holders of
Registrable Securities with copies of such registration statements and of the
prospectus included therein in such quantities as may be reasonably necessary
for the purpose of the proposed disposition.
11. Sale of Warrant Shares Without Registration. The holder of this
-------------------------------------------
Warrant Certificate, by acceptance hereof, and the holder of any Warrant Shares,
by acceptance thereof, agrees to give written notice to Company of such holder's
intention before selling or otherwise disposing of the Warrant Shares, except to
the extent that such sale is pursuant to a then effective registration
statement. Such notice shall describe briefly the manner of any proposed sale
or other disposition to be made of Warrant Shares. Such notice shall be
accompanied by an opinion
7
<PAGE>
of counsel reasonably satisfactory to the Company stating that the proposed
exercise or sale or other disposition may be effected without registration or
qualification (under any federal or state law) of Warrant Shares. The Company,
as promptly as practicable, shall notify such holder if such opinion is
satisfactory, whereupon such holder shall be entitled to sell or otherwise
dispose of the Warrant Shares or to receive the certificates representing the
shares of Common Stock or to receive the certificates representing the Warrant
Shares and dispose of the shares so received, all in accordance with the terms
of the notice of intent delivered by such holder to the Company and in
accordance with all other applicable terms and conditions contained herein.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
--------------------------------------
of reasonable evidence satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of a Warrant Certificate and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
13. Notices. All notices, requests and demands to or upon the Company
-------
and/or the holders of Warrants and/or Warrant Shares shall be deemed to have
been given or made when deposited in the mails, postage prepaid, registered or
certified mail, return receipt requested, or, in the case of telegraphic notice,
when delivered to the telegraph company, charges prepaid addressed as follows or
to such other address as may be hereafter designated in writing in accordance
herewith by the Company and/or the holder of Warrants and/or Warrant Shares.
The Company:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, Pennsylvania 19355
Attention: Mr. Jason Liu
With a copy to its
Counsel:
Cozen and O'Connor
Third Floor, Atrium Building
1900 Market Street
Philadelphia, Pennsylvania 19103
Attention: Michael J. Heller
Holders of Warrants
and/or Warrant Shares:
Progress Capital, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: Steven D. Hobman
8
<PAGE>
With a copy to its
Counsel:
Buchanan Ingersoll, P.C.
Eleven Penn Center, 14th Floor
Philadelphia, PA 19103 - 2985
Attention: Nora Winkelman
14. Headings. The descriptive headings of the several sections of this
--------
Warrant Certificate are inserted for convenience only and do not constitute a
part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has
caused this Common Stock Purchase Warrant Certificate to be duly executed under
its corporate seal as of the 30th day of July, 1998.
QUADRANT INTERNATIONAL, INC.
Attest: /s/ Jason Liu By: /s/ Francis E. Wilde
------------------------------ ---------------------------
Secretary Name:
Title:
9
<PAGE>
EXHIBIT 4.6
THIS WARRANT AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE;
ACCORDINGLY, NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER ARE
FREELY TRANSFERABLE AND NEITHER MAY BE SOLD, TRANSFERRED, OR ASSIGNED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, TRANSFER, OR
ASSIGNMENT.
QUADRANT INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
-----------------------------------------
MB NO. 2
ISSUED TO: MERIDIAN BANK
GREAT VALLEY CORPORATE CENTER
55 VALLEY STREAM PARKWAY, SUITE 200
MALVERN, PENNSYLVANIA 19355
NUMBER OF SHARES TO BE
ISSUED UPON EXERCISE IN FULL: 60,000
PURCHASE PRICE PER SHARE: $ 0.26133
GROSS PURCHASE PRICE: $15,679.80
FOR VALUE RECEIVED, QUADRANT INTERNATIONAL, INC., a Pennsylvania
corporation (the "Company"), promises to issue to Meridian Bank, a Pennsylvania
banking corporation, or any successor entity ("Meridian Bank"), sixty thousand
(60,000) fully paid and non-assessable shares of the Company's voting common
stock for the price of $0.26133 per share (the "Purchase Price"). The holder of
this Warrant Certificate shall have the right to exercise the rights provided
for herein (such rights, with respect to each such share, is called herein a
"Warrant" and with respect to more than one share, is called herein "Warrants"),
in whole or in part at any time or times until seven (7) years after the date
hereof (as set forth on the signature page hereof). The number of shares of
common stock purchasable upon exercise of the Warrants and the Purchase Price
shall be subject to adjustment from time to time as set forth herein.
1. Definitions. For purposes of this Warrant Certificate:
-----------
(a) "Common Stock" shall mean, in addition to the classes of common
------------
stock now in existence, any and all other stock of any class which has the right
to participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
<PAGE>
"Common Stock" shall not include any shares at any time directly or indirectly
owned by the Company.
(b) "Warrant" shall mean the right given under this Warrant
-------
Certificate to purchase one share of the Company's voting common stock.
(c) "Warrant Shares" shall mean the shares of the Company's voting
--------------
common stock purchased upon exercise of Warrants or which the holder hereof has
the right to purchase upon exercise of Warrants.
2. Exercise of Warrants.
--------------------
(a) Warrants may be exercised in whole or in part by the surrender of
this Warrant Certificate, properly endorsed, accompanied by written notice to
the Company by execution of the form of subscription attached hereto, at the
principal executive office of the Company and upon payment to the Company by
certified check or bank draft of the Purchase Price for the shares purchasable
thereunder. The persons entitled to the shares so purchased shall be treated
for all purposes as the holders of such shares as of the close of business on
the date of exercise. Certificates for the Warrant Shares so purchased together
with a new Warrant Certificate or Certificates of like tenor representing in the
aggregate the right to purchase the number of shares of the Company's common
stock with respect to which Warrants have not been exercised (each such Warrant
Certificate or Certificates to be for such portion of the total shares as the
holder thereof shall designate), shall be issued and delivered to the persons so
entitled within a reasonable time, not exceeding 15 days, after such exercise.
(b) Until such time as a Warrant is exercised in whole or in part, the
holder thereof shall have no rights as a shareholder of the Company except for
such rights as are expressly set forth herein.
3. Exchange. This Warrant Certificate is exchangeable, upon the
--------
surrender thereof by the holder thereof at any office of the Company, for a new
Warrant Certificate of like tenor representing in the aggregate the right to
purchase the number of shares of the Company's voting common stock purchasable
under the Warrant Certificate being exchanged, each such new warrant Certificate
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of the Company's voting common stock represented by
the Warrant Certificate being exchanged as shall be designated by such holder at
the time of such surrender.
4. Transfer.
--------
(a) This Warrant Certificate and the Warrants are not transferable
except to a legal successor of Meridian Bank.
(b) Meridian Bank acknowledges by acceptance of this Warrant
Certificate that the Warrant Shares may be sold only if the Warrant Shares are
registered under federal and state securities laws or if an exemption from
registration is available. The Warrant Shares presently are not so registered,
and the Company is under no obligation at any time to register them under
federal or state securities laws, except as expressly provided in this Warrant
2
<PAGE>
Certificate. Each certificate representing Warrant Shares shall bear a legend
substantially the same as the legend set forth on the first page of this Warrant
Certificate.
5. Certain Covenants of the Company. The Company covenants and agrees
--------------------------------
that all Warrant Shares will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and free from all taxes, liens, and charges with respect
to the issuance thereof provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than Meridian Bank; and, if any
other outstanding shares of Common Stock are then listed on a national or
regional securities exchange, will be so listed. The Common Stock is not
presently listed on any securities exchange and the Company is under no
obligation to list it. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant Certificate may be
exercised, the Company shall, at all times, have authorized and reserved for the
purpose of issuance upon exercise of the purchase rights evidenced by this
Warrant Certificate, a sufficient number of shares of the Company's common stock
to provide for the then exercise of the rights represented by this warrant
Certificate.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Warrant Shares purchasable hereunder and the Purchase Price shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification (other than a change in par value or from par value to no par
value) or change of outstanding securities issuable upon exercise of this
Warrant Certificate, or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any such reclassification or change), the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefor, execute and deliver to each holder of
Warrants, a new Warrant Certificate, providing that the holder of such new
Warrant Certificate shall have the right to exercise such new Warrant
Certificate (upon terms no less favorable to the holder than those then
applicable to this Warrant Certificate) and procure upon such exercise in lieu
of each share of the Company's voting common stock theretofore issuable upon
exercise of the Warrants the kind and amount of shares of stock, other
securities, money or property (the "Consideration") receivable upon such
reclassification, change, consolidation, or merger, by the holder of one share
of the Company's voting common stock issuable upon exercise of the Warrants as
though this Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions of
this Section 6(a) shall similarly apply to successive reclassifications,
changes, consolidations or mergers. The Company shall use its best efforts to
give Meridian Bank no less than 30 days prior written notice of any
reclassification, change of outstanding securities, merger or consolidation
described in this Section 6(a).
(b) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while any Warrants remain outstanding and unexpired, shall subdivide or combine
any of its Common Stock, the Purchase Price shall be proportionately reduced and
the number of Warrant Shares
3
<PAGE>
purchasable hereunder proportionately increased, in the case of a subdivision of
shares, or vice versa in the case of a combination of shares, in either case as
of the effective date of such subdivision or combination.
(c) Certain Dividends and Distributions. If at any time while any
-----------------------------------
Warrants are outstanding and unexpired the Company shall:
(i) Pay a dividend payable in its Common Stock, or in rights to
acquire (by exercise, conversion or otherwise) its Common Stock, then the number
of Warrants shall be adjusted as of the date of such dividend, by multiplying
the number of Warrants represented by this Warrant Certificate immediately prior
to such date by a fraction (I) the numerator of which shall be the total number
of shares of Common Stock outstanding immediately after such dividend and (II)
the denominator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend; or
(ii) Authorize a distribution of its assets to the holders of its
Common Stock as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law, the Company shall give notice thereof to the
holder of this Warrant Certificate at least 30 days prior to the record date for
determining entitlement to such distribution; and the holder of this Warrant
Certificate shall, upon exercise of the Warrants, be entitled to participate in
such distribution, without payment of any additional consideration therefor,
according to the number of shares of Common Stock held by such holder after the
exercise of the Warrants pro rata with all other holders of the Company's Common
Stock.
(d) Adjustment of Purchase Price. Upon each adjustment of the number
----------------------------
of shares of the Company's voting common stock purchasable hereunder, the
Purchase Price then in effect shall likewise be adjusted to that amount
determined by multiplying the Purchase Price then in effect by a fraction the
number of which is the number of shares of the Company's voting common stock
purchasable hereunder immediately prior to the adjustment and the denominator of
which is the number of shares of the Company's voting common stock purchasable
hereunder immediately after such adjustment.
(e) Other Action Affecting Common Stock. If any event occurs as to
-----------------------------------
which the other provisions of this Section 6 are not strictly applicable, or if
strictly applicable would not fairly protect the holder of Warrants against
dilution in accordance with the intent and principles of such Section 6, then
the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
anti-dilution rights as aforesaid.
7. Notice of Adjustments. In the event the Company shall take any action
---------------------
which pursuant to Section 6 results in an adjustment of the Purchase Price
and/or the number of Warrant Shares purchasable upon exercise of Warrants, the
Company will give to each holder of Warrants written notice of such action
promptly following its effective date. Such notice shall contain the Company's
certificate signed by its President setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which the Company's Board of
4
<PAGE>
Directors made any determination hereunder), and the Purchase Price and number
of Warrant Shares purchasable after giving effect to such adjustment. Failure to
give any notice required by this Warrant Certificate shall not effect the
validity of any action taken that triggers an adjustment under Section 6.
8. Co-Sale Rights. Until an initial public offering of securities of the
--------------
Company, in the event Gregg Garnick (the "Principal") receives a bona fide
offer, which offer the Principal desires to accept, from an unaffiliated third
party (hereinafter called the "Section 8 Offeror") to purchase more than 50% of
the Common Stock of the Company owned by the Principal for a specified price
Payable in cash or otherwise and on specified terms and conditions (hereinafter
called the "Section 8 Offer"), the Principal shall promptly forward a copy of
the Section 8 Offer to Meridian Bank. The Principal shall not transfer any such
securities to the Section 8 Offeror unless the Section 8 Offeror offers to
concurrently purchase a pro rata number of Warrant Shares which Meridian Bank,
by written notice to the Principal given within 10 days after their receipt of
the Section 8 Offer, advises it wants to sell on the terms and conditions set
forth in the Section 8 Offer. If Meridian Bank has not yet exercised the
Warrants covering the Warrant Shares it wishes to sell, it must do so prior to
the closing of such sale. For purposes of determining Meridian Bank's "pro rata
number of Warrant Shares", Meridian Bank shall be deemed to hold all Warrant
Shares actually then held by it plus all Warrant Shares issuable under upon
exercise of the Warrants then held by it. Meridian Bank acknowledges that the
rights granted hereunder have also been granted to other security holders of the
Company and agrees that such rights shall be pari passu with the rights of such
other parties.
9. No Registration under Securities Act. Neither this Warrant
------------------------------------
Certificate nor the Warrant Shares have been registered under the Securities Act
of 1933, as amended (the "Act") or under the securities laws of any state. In
issuing this Warrant Certificate, the Company has relied upon the exemption from
registration provided by Section 4(2) of the Act for transactions by an issuer
not involving any public offering. The holder of this Warrant Certificate
acknowledges by acceptance of this Warrant Certificate that the sale of
Warrants, or of any of the Warrant Shares, under certain circumstances may be
deemed to constitute a distribution within the meaning of, and require
registration under, the Act.
10. Subsequent Registration by Company of the Securities.
----------------------------------------------------
(a) As used herein, the term "Registrable Security" means each of the
shares of Common Stock issuable upon exercise of this Warrant and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
shares; provided, however, that Registerable Security shall not include any such
-------- -------
shares (i) disposed of pursuant to one or more registration statements under the
Act, (ii) which are saleable pursuant to Rule 144 under the Act or (iii) which
have otherwise been sold or transferred without registration under the Act.
(b) If the Company shall seek to register under the Act or qualify any
of its Common Stock (except in connection with or an acquisition, merger or
exchange of stock, to be registered on Forms S-4, S-8 or any successor forms
under the Act) and if the form of registration statement proposed to be used
otherwise may be used for the registration of the Registerable Securities, then,
on each such occasion, the Company shall furnish the holders of Registerable
Securities (including the holders of Warrants exercisable for Registrable
Securities)
5
<PAGE>
with at least 30 days prior written notice thereof. At the written request of
any such holders, given within 20 days after the receipt of such notice, the
Company will use its best efforts to cause all of the Registerable Securities
for which registration shall have been so requested to be included in such
registration statement. In the event that the proposed registration by the
Company is, in whole or in part, an underwritten public offering, and the
managing underwriter determines and advises in writing that the securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration, in the
following order of priority: (i) first, the securities the Company proposes to
register (which triggers this Section 10), whether for its own account or for
the account of any of its securityholders who have exercised demand registration
rights or who hold shares of Common Stock representing not less than five
percent (5%) of the issued and outstanding Common Stock of the Company on a
fully-diluted basis; (ii) second, the Registrable Securities and the securities
of any other securityholders of the Company (including, but not limited to, NEPA
Venture Fund II, L.P. to the extent it exercises its piggyback registration
rights) with rights equal to those of the holders of Registrable Securities, pro
rata (based on the number of fully diluted shares of the Company then owned by
such holders), and (iii) third, other securities requested to be included in
such registration statement.
(c) All expenses in connection with the preparation and filing of any
registration statement under this Section 10, any registration or qualification
under securities or blue Sky laws of states in which the offering will be made
under such registration statement, and any filing fee of the National
Association of Securities Dealers, Inc. relating to such offering, shall be
borne in full by the Company, except for (i) any underwriter's or broker's
commissions applicable to the shares to be sold by the holders of Registerable
Securities, (ii) fees required to be paid by a selling shareholder rather than
the Company in order to comply with Blue Sky or state securities laws, (iii) all
fees or expenses expressly applicable to securities being sold by the holders of
Registrable Securities and (iv) fees or expenses of such holder's counsel.
(d) The Company shall indemnify and hold harmless selling holders of
Registrable Securities and, to the extent required in any agreement with any
underwriter or broker-dealer for whom the Registerable Securities may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Act) against all
losses, claims, damages, liabilities, expenses or actions in respect thereof
caused by any untrue statement of a material fact contained in any registration
statement under which such Registerable Securities were registered under the
Act, any preliminary or final prospectus contained therein, or any amendment or
supplement thereto (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registerable
Securities that are subject to a claimed right of indemnification) or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading (unless cured by an
amendment or supplement to the prospectus delivered to the selling holders prior
to the sales of the registerable securities that are subject to a claimed right
or indemnification); except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to the Company by the selling holders of
Registrable Securities expressly for use therein. In connection with any such
registration statement, the selling holders of Registrable Securities will
furnish the Company in writing such information as the Company may reasonably
request for use in any such registration statement or prospectus and they will,
as a condition
6
<PAGE>
precedent to the Company's obligation hereunder, agree to indemnify the Company,
its directors and officers, and, to the extent required in any agreement with
any underwriter or broker-dealer, each such underwriter or broker-dealer and
each person, if any, who controls the Company or any underwriter or broker-
dealer (within the meaning of the Act) against any loses, claims, damages,
liabilities, statement of a material fact contained in any such registration
statement or prospectus or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
no misleading, insofar as such losses, claims, damages, liabilities, expenses or
actions are caused by any untrue statement or omission based upon information
furnished in writing to the Company by the selling holders expressly for use
therein.
(e) If a public offering is not completed within nine months after the
effective date of any registration statement filed by the Company pursuant to
Section 10(b), the Company reserves the right, in its option, to withdraw from
registration any securities offered by the Company which have not been sold
during such period.
(f) Notwithstanding the foregoing, the Company reserves the right to
delay such registration, or to withhold efforts to cause the registration
statement to become effective, if the Company determines in good faith that such
registration might (i) interfere with or affect the negotiation or completion of
any transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that might not be in the best
interest of the Company's shareholders.
The selling holders of Registrable Securities, upon receipt of notice from the
Company that an event has occurred which requires a post-effective amendment to
any registration statement or supplement to the prospectus included therein,
shall promptly discontinue the sale of their Registerable Securities until they
receive a copy of a supplemented or amended prospectus from the Company, which
the Company shall provide as soon as practicable after such notice.
(g) The Company shall have the right to grant any registration rights
or register any securities for the account of any person other than holders of
Registerable Securities regardless of whether such rights are senior,
subordinate or equal to those of the holders of Registerable Securities.
(h) In the case of any registration initiated under this Section 10,
the Company shall have the right to designate the managing underwriter in any
underwritten offering. The Company will supply the selling holders of
Registrable Securities with copies of such registration statements and of the
prospectus included therein in such quantities as may be reasonably necessary
for the purpose of the proposed disposition.
11. Sale of Warrant Shares Without Registration. The holder of this
-------------------------------------------
Warrant Certificate, by acceptance hereof, and the holder of any Warrant Shares,
by acceptance thereof, agrees to give written notice to Company of such holder's
intention before selling or otherwise disposing of the Warrant Shares, except to
the extent that such sale is pursuant to a then effective registration
statement. Such notice shall describe briefly the manner of any proposed sale
or other disposition to be made of Warrant Shares. Such notice shall be
accompanied by an opinion of counsel reasonably satisfactory to the Company
stating that the proposed exercise or sale or
7
<PAGE>
other disposition may be effected without registration or qualification (under
any federal or state law) of Warrant Shares. The Company, as promptly as
practicable, shall notify such holder if such opinion is satisfactory, whereupon
such holder shall be entitled to sell or otherwise dispose of the Warrant Shares
or to receive the certificates representing the shares of Common Stock or to
receive the certificates representing the Warrant Shares and dispose of the
shares so received, all in accordance with the terms of the notice of intent
delivered by such holder to the Company and in accordance with all other
applicable terms and conditions contained herein.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
--------------------------------------
of reasonable evidence satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of a Warrant Certificate and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
13. Notices. All notices, requests and demands to or upon the Company
-------
and/or the holders of Warrants and/or Warrant Shares shall be deemed to have
been given or made when deposited in the mails, postage prepaid, registered or
certified mail, return receipt requested, or, in the case of telegraphic notice,
when delivered to the telegraph company, charges prepaid addressed as follows or
to such other address as may be hereafter designated in writing in accordance
herewith by the Company and/or the holder of Warrants and/or Warrant Shares.
The Company:
Quadrant International, Inc.
170 South Warner Road, Suite 102
Wayne, Pennsylvania 19087
With a copy to its
Counsel:
Cozen and O'Connor
Third Floor, Atrium Building
1900 Market Street
Philadelphia, Pennsylvania 19103
Attention: Michael Heller
Holders of Warrants
and/or Warrant Shares:
Meridian Bank
Great Valley Corporate Center
55 Valley Stream Parkway, Suite 200
Malvern, Pennsylvania 19355
Attn: Ash Lilani
OR
To the appropriate address of each holder as provided by such holder to the
Company.
8
<PAGE>
14. Headings. The descriptive headings of the several sections of this
--------
Warrant Certificate are inserted for convenience only and do not constitute a
part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has
caused this Common Stock Purchase Warrant Certificate to be duly executed under
its corporate seal as of the 11th day of June, 1996.
QUADRANT INTERNATIONAL, INC.
Attest: /s/ Randi Garnick By: /s/ Gregg W. Garnick
-------------------------- -----------------------------
Secretary Name:
Title:
For purposes of Section 8 only
_________________________________
Principal
9
<PAGE>
EXHIBIT 4.7
THIS WARRANT AND THE COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE FEDERAL SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE;
ACCORDINGLY, NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER ARE
FREELY TRANSFERABLE AND NEITHER MAY BE SOLD, TRANSFERRED, OR ASSIGNED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
OR UPON RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH SALE, TRANSFER, OR
ASSIGNMENT.
QUADRANT INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
-----------------------------------------
MB NO. 1
ISSUED TO: MERIDIAN BANK
GREAT VALLEY CORPORATE CENTER
55 VALLEY STREAM PARKWAY, SUITE 200
MALVERN, PENNSYLVANIA 19355
NUMBER OF SHARES TO BE
ISSUED UPON EXERCISE IN FULL: 100,000
PURCHASE PRICE PER SHARE: $0.26133
GROSS PURCHASE PRICE: $ 20,900
FOR VALUE RECEIVED, QUADRANT INTERNATIONAL, INC., a Pennsylvania
corporation (the "Company"), promises to issue to Meridian Bank, a Pennsylvania
banking corporation, or any successor entity ("Meridian Bank"), one hundred
thousand (100,000) fully paid and non-assessable shares of the Company's voting
common stock for the price of $0.26133 per share (the "Purchase Price"), after
giving effect to the stock split in the form of a 19 for 1 stock dividend to
occur in March, 1996 (the "1996 Stock Dividend"). The holder of this Warrant
Certificate shall have the right to exercise the rights provided for herein
(such rights, with respect to each such share, is called herein a "Warrant" and
with respect to more than one share, is called herein "Warrants"), in whole or
in part at any time or times until seven (7) years after the date hereof (as set
forth on the signature page hereof). The number of shares of common stock
purchasable upon exercise of the Warrants and the Purchase Price shall be
subject to adjustment from time to time as set forth herein.
1. Definitions. For purposes of this Warrant Certificate:
-----------
(a) "Common Stock" shall mean, in addition to the classes of common
------------
stock now in existence, any and all other stock of any class which has the right
to participate in the
<PAGE>
distribution of earnings and assets of the Company without limit as to amount or
percentage. "Common Stock" shall not include any shares at any time directly or
indirectly owned by the Company.
(b) "Warrant" shall mean the right given under this Warrant
-------
Certificate to purchase one share of the Company's voting common stock.
(c) "Warrant Shares" shall mean the shares of the Company's voting
--------------
common stock purchased upon exercise of Warrants or which the holder hereof has
the right to purchase upon exercise of Warrants.
2. Exercise of Warrants.
--------------------
(a) Warrants may be exercised in whole or in part by the surrender of
this Warrant Certificate, properly endorsed, accompanied by written notice to
the Company by execution of the form of subscription attached hereto, at the
principal executive office of the Company and upon payment to the Company by
certified check or bank draft of the Purchase Price for the shares purchasable
thereunder. The persons entitled to the shares so purchased shall be treated
for all purposes as the holders of such shares as of the close of business on
the date of exercise. Certificates for the Warrant Shares so purchased together
with a new Warrant Certificate or Certificates of like tenor representing in the
aggregate the right to purchase the number of shares of the Company's common
stock with respect to which Warrants have not been exercised (each such Warrant
Certificate or Certificates to be for such portion of the total shares as the
holder thereof shall designate), shall be issued and delivered to the persons so
entitled within a reasonable time, not exceeding 15 days, after such exercise.
(b) Until such time as a Warrant is exercised in whole or in part, the
holder thereof shall have no rights as a shareholder of the Company except for
such rights as are expressly set forth herein.
3. Exchange. This Warrant Certificate is exchangeable, upon the
--------
surrender thereof by the holder thereof at any office of the Company, for a new
Warrant Certificate of like tenor representing in the aggregate the right to
purchase the number of shares of the Company's voting common stock purchasable
under the Warrant Certificate being exchanged, each such new Warrant Certificate
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of the Company's voting common stock represented by
the Warrant Certificate being exchanged as shall be designated by such holder at
the time of such surrender.
4. Transfer.
--------
(a) This Warrant Certificate and the Warrants are not transferable
except to a legal successor of Meridian Bank.
(b) Meridian Bank acknowledges by acceptance of this Warrant
Certificate that the Warrant Shares may be sold only if the Warrant Shares are
registered under federal and state securities laws or if an exemption from
registration is available. The Warrant Shares presently are not so registered,
and the Company is under no obligation at any time to register them under
federal or state securities laws, except as expressly provided in this Warrant
2
<PAGE>
Certificate. Each certificate representing Warrant Shares shall bear a legend
substantially the same as the legend set forth on the first page of this Warrant
Certificate.
5. Certain Covenants of the Company. The Company covenants and agrees
--------------------------------
that all Warrant Shares will, upon issuance, be duly and validly issued, fully
paid and nonassessable, and free from all taxes, liens, and charges with respect
to the issuance thereof provided that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than Meridian Bank; and, if any
other outstanding shares of Common Stock are then listed on a national or
regional securities exchange, will be so listed. The Common Stock is not
presently listed on any securities exchange and the Company is under no
obligation to list it. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant Certificate may be
exercised, the Company shall, at all times, have authorized and reserved for the
purpose of issuance upon exercise of the purchase rights evidenced by this
Warrant Certificate, a sufficient number of shares of the Company's common stock
to provide for the then exercise of the rights represented by this Warrant
Certificate.
6. Adjustment of Purchase Price and Number of Shares. The number of
-------------------------------------------------
Warrant Shares purchasable hereunder and the Purchase Price shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) Reclassification, Consolidation or Merger. In case of any
-----------------------------------------
reclassification (other than a change in par value or from par value to no par
value) or change of outstanding securities issuable upon exercise of this
Warrant Certificate, or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any such reclassification or change), the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefor, execute and deliver to each holder of
Warrants, a new Warrant Certificate, providing that the holder of such new
Warrant Certificate shall have the right to exercise such new Warrant
Certificate (upon terms no less favorable to the holder than those then
applicable to this Warrant Certificate) and procure upon such exercise in lieu
of each share of the Company's voting common stock theretofore issuable upon
exercise of the Warrants the kind and amount of shares of stock, other
securities, money or property (the "Consideration") receivable upon such
reclassification, change, consolidation, or merger, by the holder of one share
of the Company's voting common stock issuable upon exercise of the Warrants as
though this Warrant Certificate had been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions of
this Section 6(a) shall similarly apply to successive reclassifications,
changes, consolidations or mergers. The Company shall use its best efforts to
give Meridian Bank no less than 30 days prior written notice of any
reclassification, change of outstanding securities, merger or consolidation
described in this Section 6(a).
(b) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while any Warrants remain outstanding and unexpired, shall subdivide or combine
any of its Common Stock, the Purchase Price shall be proportionately reduced and
the number of Warrant Shares
3
<PAGE>
purchasable hereunder proportionately increased, in the case of a subdivision of
shares, or vice versa in the case of a combination of shares, in either case as
of the effective date of such subdivision or combination.
(c) Certain Dividends and Distributions. If at any time while any
-----------------------------------
Warrants are outstanding and unexpired the Company shall:
(i) Pay a dividend payable in its Common Stock (other than the
1996 Stock Dividend), or in rights to acquire (by exercise, conversion or
otherwise) its Common Stock, then the number of Warrants shall be adjusted as of
the date of such dividend, by multiplying the number of Warrants represented by
this Warrant Certificate immediately prior to such date by a fraction (I) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend and (II) the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such dividend; or
(ii) Authorize a distribution of its assets to the holders of its
Common Stock as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law, the Company shall give notice thereof to the
holder of this Warrant Certificate at least 30 days prior to the record date for
determining entitlement to such distribution; and the holder of this Warrant
Certificate shall, upon exercise of the Warrants, be entitled to participate in
such distribution, without payment of any additional consideration therefor,
according to the number of shares of Common Stock held by such holder after the
exercise of the Warrants pro rata with all other holders of the Company's Common
Stock.
(d) Adjustment of Purchase Price. Upon each adjustment of the number
----------------------------
of shares of the Company's voting common stock purchasable hereunder, the
Purchase Price then in effect shall likewise be adjusted to that amount
determined by multiplying the Purchase Price then in effect by a fraction the
number of which is the number of shares of the Company's voting common stock
purchasable hereunder immediately prior to the adjustment and the denominator of
which is the number of shares of the Company's voting common stock purchasable
hereunder immediately after such adjustment.
(e) Other Action Affecting Common Stock. If any event occurs as to
-----------------------------------
which the other provisions of this Section 6 are not strictly applicable, or if
strictly applicable would not fairly protect the holder of Warrants against
dilution in accordance with the intent and principles of such Section 6, then
the Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such intent and principles, so as to protect such
anti-dilution rights as aforesaid.
7. Notice of Adjustments. In the event the Company shall take any action
---------------------
which pursuant to Section 6 results in an adjustment of the Purchase Price
and/or the number of Warrant Shares purchasable upon exercise of Warrants, the
Company will give to each holder of Warrants written notice of such action
promptly following its effective date. Such notice shall contain the Company's
certificate signed by its President setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which the Company's Board of
4
<PAGE>
Directors made any determination hereunder), and the Purchase Price and number
of Warrant Shares purchasable after giving effect to such adjustment. Failure to
give any notice required by this Warrant Certificate shall not effect the
validity of any action taken that triggers an adjustment under Section 6.
8. Co-Sale Rights. Until an initial public offering of securities of the
--------------
Company, in the event Gregg Garnick (the "Principal") receives a bona fide
offer, which offer the Principal desires to accept, from an unaffiliated third
party (hereinafter called the "Section 8 Offeror") to purchase more than 50% of
the Common Stock of the Company owned by the Principal for a specified price
payable in cash or otherwise and on specified terms and conditions (hereinafter
called the "Section 8 Offer"), the Principal shall promptly forward a copy of
the Section 8 offer to Meridian Bank. The Principal shall not transfer any such
securities to the Section 8 Offeror unless the Section 8 Offeror offers to
concurrently purchase a pro rata number of Warrant Shares which Meridian Bank,
by written notice to the Principal given within 10 days after their receipt of
the Section 8 Offer, advises it wants to sell on the terms and conditions set
forth in the Section 8 Offer. If Meridian Bank has not yet exercised the
Warrants covering the Warrant Shares it wishes to sell, it must do so prior to
the closing of such sale. For purposes of determining Meridian Bank's "pro rata
number of Warrant Shares", Meridian Bank shall be deemed to hold all Warrant
Shares actually then held by it plus all Warrant Shares issuable under upon
exercise of the Warrants then held by it. Meridian Bank acknowledges that the
rights granted hereunder have also been granted to other security holders of the
Company and agrees that such rights shall be pari passu with the rights of such
other parties.
9. No Registration under Securities Act. Neither this Warrant
------------------------------------
Certificate nor the Warrant Shares have been registered under the Securities Act
of 1933, as amended (the "Act") or under the securities laws of any state. In
issuing this Warrant Certificate, the Company has relied upon the exemption from
registration provided by Section 4(2) of the Act for transactions by an issuer
not involving any public offering. The holder of this Warrant Certificate
acknowledges by acceptance of this Warrant Certificate that the sale of
Warrants, or of any of the Warrant Shares, under certain circumstances may be
deemed to constitute a distribution within the meaning of, and require
registration under, the Act.
10. Subsequent Registration by Company of the Securities.
----------------------------------------------------
(a) As used herein, the term "Registrable Security" means each of the
shares of Common Stock issuable upon exercise of this Warrant and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
shares; provided, however, that Registerable Security shall not include any such
-------- -------
shares (i) disposed of pursuant to one or more registration statements under the
Act, (ii) which are saleable pursuant to Rule 144 under the Act or (iii) which
have otherwise been sold or transferred without registration under the Act.
(b) If the Company shall seek to register under the Act or qualify any
of its Common Stock (except in connection with or an acquisition, merger or
exchange of stock, to be registered on Forms S-4, S-8 or any successor forms
under the Act) and if the form of registration statement proposed to be used
otherwise may be used for the registration of the Registerable Securities, then,
on each such occasion, the Company shall furnish the holders of Registerable
Securities (including the holders of Warrants exercisable for Registrable
Securities)
5
<PAGE>
with at least 30 days prior written notice thereof. At the written request of
any such holders, given within 20 days after the receipt of such notice, the
Company will use its best efforts to cause all of the Registerable Securities
for which registration shall have been so requested to be included in such
registration statement. In the event that the proposed registration by the
Company is, in whole or in part, an underwritten public offering, and the
managing underwriter determines and advises in writing that the securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration, in the
following order of priority: (i) first, the securities the Company proposes to
register (which triggers this Section 10), whether for its own account or for
the account of any of its securityholders who have exercised demand registration
rights or who hold shares of Common Stock representing not less than five
percent (5%) of the issued and outstanding Common Stock of the Company on a
fully-diluted basis; (ii) second, the Registrable Securities and the securities
of any other securityholders of the Company (including, but not limited to, NEPA
Venture Fund II, L.P. to the extent it exercises its piggyback registration
rights) with rights equal to those of the holders of Registrable Securities, pro
rata (based on the number of fully diluted shares of the Company then owned by
such holders), and (iii) third, other securities requested to be included in
such registration statement.
(c) All expenses in connection with the preparation and filing of any
registration statement under this Section 10, any registration or qualification
under securities or blue Sky laws of states in which the offering will be made
under such registration statement, and any filing fee of the National
Association of Securities Dealers, Inc. relating to such offering, shall be
borne in full by the Company, except for (i) any underwriter's or broker's
commissions applicable to the shares to be sold by the holders of Registerable
Securities, (ii) fees required to be paid by a selling shareholder rather than
the Company in order to comply with Blue Sky or state securities laws, (iii) all
fees or expenses expressly applicable to securities being sold by the holders of
Registrable Securities and (iv) fees or expenses of such holder's counsel.
(d) The Company shall indemnify and hold harmless selling holders of
Registrable Securities and, to the extent required in any agreement with any
underwriter or broker-dealer for whom the Registerable Securities may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Act) against all
losses, claims, damages, liabilities, expenses or actions in respect thereof
caused by any untrue statement of a material fact contained in any registration
statement under which such Registerable Securities were registered under the
Act, any preliminary or final prospectus contained therein, or any amendment or
supplement thereto (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registerable
Securities that are subject to a claimed right of indemnification) or caused by
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading (unless cured by an
amendment or supplement to the prospectus delivered to the selling holders prior
to the sales of the registerable securities that are subject to a claimed right
or indemnification); except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to the Company by the selling holders of
Registrable Securities expressly for use therein. In connection with any such
registration statement, the selling holders of Registrable Securities will
furnish the Company in writing such information as the Company may reasonably
request for use in any such registration statement or prospectus and they will,
as a condition
6
<PAGE>
precedent to the Company's obligation hereunder, agree to indemnify the Company,
its directors and officers, and, to the extent required in any agreement with
any underwriter or broker-dealer, each such underwriter or broker-dealer and
each person, if any, who controls the Company or any underwriter or broker-
dealer (within the meaning of the Act) against any loses, claims, damages,
liabilities, statement of a material fact contained in any such registration
statement or prospectus or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
no misleading, insofar as such losses, claims, damages, liabilities, expenses or
actions are caused by any untrue statement or omission based upon information
furnished in writing to the Company by the selling holders expressly for use
therein.
(e) If a public offering is not completed within nine months after the
effective date of any registration statement filed by the Company pursuant to
Section 10(b), the Company reserves the right, in its option, to withdraw from
registration any securities offered by the Company which have not been sold
during such period.
(f) Notwithstanding the foregoing, the Company reserves the right to
delay such registration, or to withhold efforts to cause the registration
statement to become effective, if the Company determines in good faith that such
registration might (i) interfere with or affect the negotiation or completion of
any transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that might not be in the best
interest of the Company's shareholders. The selling holders of Registrable
Securities, upon receipt of notice from the Company that an event has occurred
which requires a post-effective amendment to any registration statement or
supplement to the prospectus included therein, shall promptly discontinue the
sale of their Registerable Securities until they receive a copy of a
supplemented or amended prospectus from the Company, which the Company shall
provide as soon as practicable after such notice.
(g) The Company shall have the right to grant any registration rights
or register any securities for the account of any person other than holders of
Registerable Securities regardless of whether such rights are senior,
subordinate or equal to those of the holders of Registerable Securities.
(h) In the case of any registration initiated under this Section 10,
the Company shall have the right to designate the managing underwriter in any
underwritten offering. The Company will supply the selling holders of
Registrable Securities with copies of such registration statements and of the
prospectus included therein in such quantities as may be reasonably necessary
for the purpose of the proposed disposition.
11. Sale of Warrant Shares Without Registration. The holder of this
-------------------------------------------
Warrant Certificate, by acceptance hereof, and the holder of any Warrant Shares,
by acceptance thereof, agrees to give written notice to Company of such holder's
intention before selling or otherwise disposing of the Warrant Shares, except to
the extent that such sale is pursuant to a then effective registration
statement. Such notice shall describe briefly the manner of any proposed sale
or other disposition to be made of Warrant Shares. Such notice shall be
accompanied by an opinion of counsel reasonably satisfactory to the Company
stating that the proposed exercise or sale or other disposition may be effected
without registration or qualification (under any federal or state
7
<PAGE>
law) of Warrant Shares. The Company, as promptly as practicable, shall notify
such holder if such opinion is satisfactory, whereupon such holder shall be
entitled to sell or otherwise dispose of the Warrant Shares or to receive the
certificates representing the shares of Common Stock or to receive the
certificates representing the Warrant Shares and dispose of the shares so
received, all in accordance with the terms of the notice of intent delivered by
such holder to the Company and in accordance with all other applicable terms and
conditions contained herein.
12. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
--------------------------------------
of reasonable evidence satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of a Warrant Certificate and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
13. Notices. All notices, requests and demands to or upon the Company
-------
and/or the holders of Warrants and/or Warrant Shares shall be deemed to have
been given or made when deposited in the mails, postage prepaid, registered or
certified mail, return receipt requested, or, in the case of telegraphic notice,
when delivered to the telegraph company, charges prepaid addressed as follows or
to such other address as may be hereafter designated in writing in accordance
herewith by the Company and/or the holder of Warrants and/or Warrant Shares.
The Company:
Quadrant International, Inc.
170 South Warner Road, Suite 102
Wayne, Pennsylvania 19087
with a copy to its Counsel:
Cozen and O'Connor
Third Floor, Atrium Building
1900 Market Street
Philadelphia, Pennsylvania 19103
Attention: Michael Heller
Holders of Warrants
and/or Warrant Shares:
Meridian Bank
Great Valley Corporate Center
55 Valley Stream Parkway, Suite 200
Malvern, Pennsylvania 19355
Attn: Steven D. Hobman
OR
8
<PAGE>
To the appropriate address of each holder as provided by such holder
to the Company.
14. Headings. The descriptive headings of the several sections of this
--------
Warrant Certificate are inserted for convenience only and do not constitute a
part of this Warrant Certificate.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has
caused this Common Stock Purchase Warrant Certificate to be duly executed under
its corporate seal as of the 15th day of March , 1996.
--------- ---------
QUADRANT INTERNATIONAL, INC.
Attest: /s/ Randi Garnick By: /s/ Gregg Garnick
------------------------ -------------------------
Secretary President
For purposes of Section 8 only
/s/ Gregg Garnick
----------------------------
Principal
9
<PAGE>
EXHIBIT 4.8
SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT
------------------------------------------------
This AGREEMENT is entered into as of this 18th day of March, 1996, by and
among QUADRANT INTERNATIONAL INC., a Pennsylvania corporation with its principal
place of business at 170 Warner Road, Suite 102, Wayne, PA 19087 (the
"Company"), GREGG GARNICK, an individual (the "Founder") and NEPA VENTURE FUND
II, L.P., a Pennsylvania limited partnership with offices at 125 Goodman Drive,
Bethlehem, Pennsylvania 18015 (the "Investor").
In consideration of the mutual agreements, undertakings and covenants
herein contained, the parties, intending to be legally bound hereby, agree as
follows:
I. Purchase of Subordinated Notes and Warrants.
-------------------------------------------
1.1 Authorization of Subordinated Notes, Preferred Stock, Warrants
--------------------------------------------------------------
and Common Stock. The Company, before the Initial Closing as defined in Section
- ----------------
2.1 hereof, will have authorized the issuance and sale of up to $250,000.00 in
aggregate principal amount of its 9% subordinated notes (the "Notes") and the
issuance of up to six warrants (the "Warrants") to purchase an aggregate of up
to 717,500 shares of Class A Convertible Preferred Stock of the Company, par
value $.0l per share (the "Preferred Stock") to be issued upon exercise of the
Warrants upon the terms and conditions set forth in the Warrants and the
issuance of the Preferred Stock to be issued upon exercise of the Warrants, for
an aggregate purchase price of up to $250,000.00 (the "Purchase Price"). The
Preferred Stock in turn shall be convertible into shares of the common stock of
the Company, par value $.0l per share (the "Common Stock"), at the rates, and
otherwise shall have the designations, preferences, limitations, and rights,
provided for in the Amended and Restated Articles of Incorporation of the
Company, as further amended by an amendment to increase the authorized capital
of the Company (the "Amendment") in the form attached as Exhibit A hereto, in
---------
connection with a stock split of the Common Stock, to occur effective upon the
filing of the Amendment.
1.2 Sale of Subordinated Notes. Subject to the terms and conditions
--------------------------
of this Agreement, the Company will issue and sell to the Investor, and the
Investor will purchase from the Company, Notes in an aggregate principal amount
of up to $250,000.00. One Note, in the principal amount of $125,000.00, shall be
issued to the Investor by the Company and dated with the date hereof as the date
of issuance, with the full principal amount thereof being payable and maturing
on November 29, 2003, and bearing interest at the rate of 9% per annum from the
date of issuance, which interest shall be payable, for the first year after
issuance, in arrears on the first anniversary of the issuance of such Note, and
thereafter, quarterly in arrears on the first day of June, September, October
and March, commencing June 1, 1997 and having the other terms and conditions
provided herein and in the form of Note attached hereto as Exhibit B (the
---------
"Initial Note"). Up to five other Notes shall be issued to the Investor by the
Company pursuant to the terms and conditions hereof in a principal amount of
between one and five times $25,000, to be dated the respective dates of
issuance, with the full principal amount thereof being payable and maturing on
November 29, 2003 (the eighth anniversary of the issuance of the first "Bridge
<PAGE>
Note" (as defined in Section 2.4)), and bearing interest at the rate of 9% per
annum from the date of issuance, which interest shall be payable quarterly in
arrears commencing on the first day of the month after the month in which each
such additional Note is issued, and having the other terms and conditions
provided herein and in the form of Note attached hereto as Exhibit C
---------
(collectively, "Subsequent Notes" and individually, a "Subsequent Note").
1.3 Sale of Warrants. Subject to the terms and conditions of this
----------------
Agreement, the Company will issue and sell to the Investor, and the Investor
will purchase from the Company, as part of the consideration for the purchase of
the Notes and the payment of the Purchase Price, the Warrants, in the form of
the Warrant Certificate attached hereto as Exhibit D with respect to the
---------
issuance of the Initial Note (the "Initial Warrant"), or Exhibit E with respect
---------
to the issuance of any Subsequent Note (each such Warrant being hereinafter
referred to as a "Subsequent Warrant" and collectively, as the "Subsequent
Warrants"). Upon the filing of the Amendment, the Warrants shall grant to the
Investor the right to purchase an aggregate of a maximum of 717,500 shares of
Preferred Stock, at an exercise price per share and subject to adjustment as to
such number of shares of Preferred Stock, all as provided in the Warrants.
1.4 Certain Terms; Allocation of Purchase Price. The shares of
-------------------------------------------
Preferred Stock issuable upon exercise of the Warrants shall be hereinafter
referred to as the "Warrant Shares." The Warrants and the Warrant Shares shall
be hereinafter collectively referred to as the "Warrant Securities." The holders
of the Warrants and/or the Warrant Shares shall be hereinafter referred to as
the "Holders of the Warrant Securities." The holders of the Preferred Stock
shall be hereinafter referred to as the "Holders of the Preferred Stock." The
shares of Common Stock issuable upon conversion of the Preferred Stock shall
hereinafter be referred to as the "Conversion Shares," and the Notes, the
Warrants, the Common Stock, the Preferred Stock and the Conversion Shares shall
hereinafter collectively be referred to as the "Securities." The Company and the
Investor, having reviewed the risks and valuation of an investment in the Notes
and the Warrants, having adverse interests and as a result of arm's length
bargaining, hereby agree that (i) neither the Investor nor any of the partners
or affiliates of the Investor has rendered or agreed to render any services to
the Company in connection with this Agreement or the issuance of the Notes and
Warrants; (ii) the Warrants are not being issued as compensation; and (iii) the
portion of the Purchase Price allocable to the Notes and Warrants is as follows:
to the Initial Note $122,330.08; to the Initial Warrant $2,669.92; to each
$25,000 in principal amount of Subsequent Note $23,932.06; and to each
associated Subsequent Warrant $1,067.94.
II. Closing Date; Conditions to Closing; Deliveries.
-----------------------------------------------
2.1 Closing Dates.
-------------
(a) Initial Closing Date. An initial closing and the delivery of
--------------------
the Initial Note and the Initial Warrant related thereto shall be held on March
18, 1996, at the offices of Ballard Spahr Andrews & Ingersoll, 1735 Market
Street, 51st Floor, Philadelphia, PA 19103-7599 ("Ballard"), concurrently with
the execution of this Agreement (the "Initial Closing"), or as soon as possible
after all of the conditions to the Initial Closing set forth in Section 2.2 of
this Agreement have been fulfilled, or at such time and place as the Company and
the Investor may agree. (The date of the Initial Closing is hereinafter referred
to as the "Initial Closing Date").
2
<PAGE>
(b) Subsequent Closings. Subsequent closings and deliveries of
-------------------
Subsequent Notes and Subsequent Warrants related thereto shall also be held at
the offices of Ballard, or at such other location as the parties may agree, upon
the fulfillment of the conditions associated with that particular subsequent
closing as set forth in Section 2.5 below.
2.2 Conditions to Initial Closing. The Investor's obligation to
-----------------------------
close on the Initial Closing shall be subject to the fulfillment on or prior to
the Initial Closing Date of the following conditions:
(a) The representations and warranties made by the Company and
the Founder contained in this Agreement shall be true and correct when made, and
shall be true and correct on the Initial Closing Date with the same force and
effect as if they had been made on and as of the Initial Closing Date.
(b) The Company and the Founder shall have performed all
obligations and conditions herein required to be performed or observed by each
of them on or prior to the Initial Closing Date.
(c) The Investor shall have received from the Company and the
Founder all items required to be delivered pursuant to Section 2.3 of this
Agreement.
(d) The Company shall have obtained all consents, permits and
waivers deemed necessary or appropriate for the consummation of the transactions
contemplated by this Agreement, including, but not limited to, the requisite
approval of the Board of Directors and the shareholders of the Company of: (i)
this Agreement; (ii) the Amendment; (iii) the issuance of the Notes, the
Warrants, the Preferred Stock, the Conversion Shares and the other Securities;
and (iv) the consummation of all other transactions contemplated hereby.
(e) The Amendment shall have been filed with the proper offices
of the Secretary of the Commonwealth of the Commonwealth of Pennsylvania.
(f) The Company shall have paid the Investor's legal fees and
disbursements of Investor's counsel related to this transaction, in the amount
indicated on bills presented to the Company at the Initial Closing.
2.3 Deliveries of the Company at the Initial Closing. The Company
------------------------------------------------
shall make the following deliveries to the Investor at the Initial Closing on
the Initial Closing Date.
(a) The Initial Note, executed by the Company in the form
attached as Exhibit B here to, in the principal amount of $125,000.00 payable to
---------
the order of the Investor.
(b) The Initial Warrant, executed by the Company in the form
attached as Exhibit D hereto, to purchase an aggregate of 239,161 shares of
---------
Preferred Stock, subject to certain adjustments set forth in the Initial
Warrant, registered in the name of the Investor.
(c) A copy of the Amendment, together with evidence sufficient
to satisfy the Investor that such Amendment was filed with the Secretary of
State of the Commonwealth of Pennsylvania on or prior to the date of the Initial
Closing.
3
<PAGE>
(d) A certificate, executed by the President of the Company,
dated the Initial Closing Date, certifying to the fulfillment of the conditions
specified in section 2.2 hereof (other than Section 2.2 (c)), and further
specifically certifying that there does not exist as of the Initial Closing Date
a state of facts that would constitute a default by the Company under any of the
terms, conditions or provisions of this Agreement, or an "Event of Default"
under any Note (collectively, all such defaults shall hereinafter be referred to
as "Defaults"), or which would, with notice or lapse of time, or both,
constitute such a Default (an "Impending Default"), and the Company is not in
default under the terms, conditions or provisions of its Articles of
Incorporation, as amended (including the Amendment), its By-laws, or any
indenture, mortgage or deed of trust or other material contract, agreement,
lease, instrument, court order, judgment, arbitration award, or decree to which
it is a party or by which it is bound or, which state of facts would, with
notice or lapse of time, or both, constitute such a default (collectively,
"Other Defaults").
(e) Copies of resolutions adopted by the Board of Directors and the
shareholders of the Company authorizing and approving this Agreement, the
Amendment, the issuance of the Notes, the Preferred Stock, the issuance of the
Warrants and the other Securities and the consummation of all other transactions
contemplated hereby, as and to the extent required by applicable law, certified
by the Secretary of the Company.
(f) Copies of the Company's Articles of Incorporation (as amended
by the Amendment) and By-laws as then in effect, all certified by the Secretary
of the Company.
(g) A Good Standing Certificate for the Company issued by the
Secretary of State of the Commonwealth of Pennsylvania, dated within 15 days
prior to the Initial Closing Date.
(h) An opinion letter, from Cozen & O'Connor, counsel to the
Company, addressed to the Investor, dated the Initial Closing Date, in a form
satisfactory to the Investor.
(i) A certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the Company's officers
and directors.
2.4 Deliveries of the Investor at the Initial Closing. The Investor
-------------------------------------------------
shall deliver and surrender to the Company for cancellation at the Initial
Closing on the Initial Closing Date, in payment for the Initial Note, those
certain demand promissory notes of the Company, one dated November 29, 1995, in
the principal amount of $75,000, the other dated January 31, 1996, in the
principal amount of $50,000 (each being a "Bridge Note" and collectively being
the "Bridge Notes"), to be credited against the purchase price of the Initial
Note; provided that the conditions contained in Section 2.2 hereof have been
--------
fulfilled, and the deliveries required to be made under Section 2.3 hereof have
been made.
2.5 Subsequent Closings. The balance of the Purchase Price shall be
-------------------
paid by the Investor, and the Subsequent Notes shall be issued by the Company,
at subsequent closings (each being a "Subsequent Closing"). Each such Subsequent
Closing shall occur at subsequent dates (each a "Subsequent Closing Date"), if
and when the particular conditions attached to the
4
<PAGE>
occurrence of such Subsequent Closing have been fulfilled. In no event shall the
Investor be under any obligation to pay any portion of the Purchase Price to the
Company if the Company fails to fulfill the conditions attached thereto. The
Investor may, however, at its option, waive any of the conditions to any such
Subsequent Closing and proceed to closing, and become entitled to the applicable
Subsequent Note and Subsequent Warrant, upon payment of the applicable portion
of the Purchase Price. In addition, unless the particular condition required for
a particular Subsequent Closing is waived, no Subsequent Closing shall occur
until (a) the Company will have provided the Investor with not less than five
business days prior written notice of the applicable Subsequent Closing Date,
which shall be no later than December 31, 1997; (b) the Company shall have
requested from the Investor payment of a portion of the Purchase Price equal to
a multiple of $25,000.00, to a maximum of $125,000 minus the aggregate amount of
portions of the Purchase Price paid at all prior Subsequent Closings, if any;
and (c) the Investor shall have received from the Company a certificate executed
by the President of the Company, on behalf of the Company, certifying and
attesting that, as of the time of the Subsequent Closing, (i) all obligations,
conditions and deliveries required to have been performed, observed or made by
the Company under Sections 2.2 and 2.3 as to the Initial Closing and 2.5 as to
the Subsequent Closing shall have been so performed, observed or made or the
Investor shall have waived the same; and (ii) that, as of such time, there does
not exist any state of facts that would constitute a Default, an Impending
Default or an Other Default. At each Subsequent Closing, the Company shall issue
a Subsequent Note and a Subsequent Warrant to the Investor, in the forms
attached as Exhibit C and Exhibit E hereto, respectively, with the Subsequent
--------- ---------
Note being in a principal amount equal to the applicable portion of the Purchase
Price to be paid at such Subsequent Closing, against receipt of the same from
the Investor and each Subsequent Warrant shall be registered in the name of the
Investor and provide the Investor with the right to purchase an aggregate of
95,668 shares of Preferred Stock, as applicable, for each $25,000 of principal
amount of Subsequent Note, to a maximum of 478,340 shares of Preferred Stock
issuable if all Subsequent Warrants are issued, subject to certain adjustments
set forth in the Subsequent Warrants.
III. Representations and Warranties of the Company and the Founder. As of
-------------------------------------------------------------
the date of this Agreement, except as set forth and identified to a specific
section number on the Schedules attached hereto setting forth the specific
exceptions to the specific sections of this Article 3, each of the Company and
the Founder represents and warrants, jointly and severally, to the Investor
(regardless of any investigation made or information obtained by the Investor),
as a material inducement to enter into this Agreement, as follows; provided,
--------
however, that where a representation or warranty in this Article 3 is limited as
- -------
to the knowledge of the Company or of the Founder, no liability shall arise to
the Company or the Founder, as applicable, for any breach of such representation
or warranty, unless knowledge of the misrepresentation or breach by the Company
or Founder can be demonstrated, notwithstanding that the representations and
warranties in this Article 3 are otherwise made jointly and severally by the
Company and the Founder:
3.1 Organization and Standing. The Company is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. As listed on Schedule 3.1 attached hereto, the Company is
------------
duly qualified to do business as a foreign corporation and is in good
5
<PAGE>
standing under the laws of each jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification, except
where the failure to be so qualified would not have a material adverse effect on
the Company. The minute books and stock records of the Company are complete and
accurate in all material respects and all signatures included therein are the
genuine signatures of the persons whose signatures are required.
3.2 Subsidiaries, etc. The Company has no subsidiaries and does not
-----------------
own any capital stock, security, partnership interest or other interest of any
kind in any corporation, partnership, joint venture, association or other
entity.
3.3 Capitalization. As of the date of this Agreement, upon filing
--------------
the Amendment, the Company's authorized capital stock consists of (a) 12,000,000
shares of Common Stock, of which 4,443,878 shares are outstanding, 123,700
shares are reserved for issuance under an option granted to Mike Harris, an
employee of the Company, as a form of incentive (the "Harris Options"); 490,730
shares (the "ESOP Options") are reserved for issuance under options or stock
grants issued pursuant to and under the terms of the to Company employees and
other persons eligible under the ESOP to be granted such options; 53,828 shares
are reserved for issuance to the Founder, 35,885 shares are reserved for
issuance to Jason Liu, 22,428 shares are reserved for issuance to Ken Horton,
17,943 shares are reserved for issuance to Michael Rivers and 14,354 shares are
reserved for issuance to Robert Russell (collectively, the "Deferral Options"),
all under options granted to such persons in connection with a deferral of
employee salaries otherwise payable by the Company to such persons; 89,713
shares are reserved for issuance to Ken Horton (collectively, the "Horton
Options") for services rendered and to be rendered to the Company by Ken Horton
from October 16, 1995 to April 15, 1996; and 100,000 shares are reserved for
issuance under a warrant the Company issued to Meridian Bank in consideration of
certain accommodations to the Company with respect to indebtedness of the
Company to Meridian Bank (collectively, the "Meridian Options") and (b)
3,109,180 shares of Preferred Stock, of which no shares are outstanding and all
of which are reserved for issuance upon exercise of all of the Warrants and
exercise of all of the warrants (collectively, the "Prior Warrants") previously
issued to the Investor pursuant to that certain purchase agreement among the
Investor, the Company and the Founder dated as of May 4, 1995 (the "Prior
Purchase Agreement"), subject to adjustment as to such number of shares of
Preferred Stock in certain circumstances, as provided in the Warrants and the
Prior Warrants. Unless the Investor or the "Designated Director" (as defined in
Section 6.2(a)) otherwise consents, prior to the issuance of the Preferred Stock
upon exercise of the Warrants or the Prior Warrants, no shares of any class or
series of Preferred Stock or any other capital stock other than the Common Stock
will be issued or outstanding. There are no treasury shares held by the Company.
All outstanding shares of capital stock are, and the Securities, when issued in
accordance with or as contemplated by the terms of this Agreement, will be,
validly issued and outstanding, fully paid and non-assessable. The Warrant
Shares and the Conversion Shares and the shares of Preferred Stock and Common
Stock issuable under the Prior Warrants have been duly and validly authorized
and reserved for issuance. Other than the shares issuable under the ESOP
Options, the Harris Options, the Deferral Options, the Horton Options and the
Meridian Options, no subscription, warrant, option or other right or commitment
to purchase or acquire from the Company any shares of any class or series of
capital stock of the Company, or any other securities of the Company, is
authorized or outstanding. A current shareholders' list giving the names,
addresses and number of shares owned by each shareholder of the Company is
attached hereto as Schedule 3.3.
------------
6
<PAGE>
3.4 Authorization. The Company has all necessary corporate power to
-------------
enter into this Agreement, to issue and deliver the Securities to be issued
hereunder, and to carry out all of the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby, including, without
limitation, the issuance of the Notes, the Preferred Stock, the Warrants and the
other Securities to be issued hereunder or under the terms of the Warrants or
the Preferred Stock, have been duly authorized by all requisite corporate action
on the part of the Company and by all requisite shareholder action on the part
of the Company's shareholders. This Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors rights and to general
equity principles.
3.5 Contracts, Leases, Agreements and Other Commitments. Except as
-----------------
described on Schedule 3.5 and, as to the Founder, limited to the best of the
------------
Founder's knowledge, the Company is not a party to or bound by any written, oral
or implied contract, agreement, lease, power of attorney, guaranty, surety
arrangement, or other commitment, in excess of $50,000 including, but not
limited to, any contract or agreement for the purchase or sale of merchandise or
for the rendition of services, but excluding any purchase orders to the Company.
3.6 Breach. The Company is not in violation or breach of any of the
------
terms, conditions or provisions of its Articles of Incorporation, as amended
(including the Amendment), its By-laws (as amended pursuant to this Agreement),
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract, agreement, lease, instrument, court order,
judgment, arbitration award, or decree to which it is a party or by which it is
bound.
3.7 Employees, Officers, and Directors. A current list of the names
----------------------------------
and addresses of all officers and directors of the Company is attached hereto as
Schedule 3.7. Except as described on Schedule 3.7, and, as to the Founder, to
- ------------ ------------
the best of the Founder's knowledge, the Company has not entered into any
agreements with any of its employees, officers, or directors, or any of its
former employees, officers, or directors.
3.8 Compliance with Laws. Except as described in Schedule 3.8, and,
-------------------- ------------
as to the Founder, limited to the best of the Founder's knowledge, the Company
is in compliance with all existing requirements of laws, Federal, state, local,
and foreign, and all existing requirements of all governmental bodies or
agencies having jurisdiction over it, the failure to comply with which might
have a material adverse effect on the Company.
3.9 Conflict with Documents. Neither the execution, delivery and
-----------------------
performance of this Agreement by the Company, nor the consummation of the
transactions contemplated hereby, either immediately or with the passage of time
or the giving of notice or both, will:
(a) Conflict with or cause a breach or default under any of the
terms, conditions or provisions of, result in a termination or modification of,
or cause any acceleration of any obligation of the Company under any material
contract, lease or other instrument to which the Company is bound or by which
any of the Company's properties or assets may be affected;
7
<PAGE>
(b) Conflict with the provisions of the Company's Articles of
Incorporation, as amended (including the Amendment), By-laws (as amended
pursuant to this Agreement) or any statute, law, rule or regulation or any
order, judgment or decree to which the Company or any of its properties or
assets are subject; or
(c) Result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material properties or
assets.
3.10 Financial Statements. The Company has furnished to the Investor
--------------------
a copy of its unaudited internally prepared balance sheet as of December 31,
1995 and the corresponding statements of income, retained earnings and changes
in financial position for the periods therein specified, a copy of which is
attached hereto as Exhibit G. As to the Founder, limited to the best of the
---------
Founder's knowledge, the unaudited financial statements referred to above are
correct, are in accordance with the Company's books and records and present
fairly, in all material respects, the Company's financial position at December
31, 1995, and the results of its operations and financial condition for the
period therein specified, subject to normal recurring adjustments.
3.11 Taxes. The Company has filed all applicable Federal, state,
-----
local and foreign tax returns required to be filed to date, in accordance with
the provisions of law pertaining thereto, and has paid all taxes, interest,
penalties and assessments required to have been paid to date. The Company has
not been advised that any of its returns, federal, state, local or foreign, have
been or are being audited as of the date hereof.
3.12 Litigation. As to the Founder, limited to the best of the
----------
Founder's knowledge, there are no pending suits, legal proceedings, claims or
governmental investigations against or with respect to the Company or its
directors or officers, or its properties or assets, nor, to the best of the
knowledge of the Company and the Founder, is any such suit, legal proceeding,
claim or governmental investigation threatened nor, to the best of the knowledge
of the Company and the Founder, is there any basis for any such suit, legal
proceeding, claim or governmental investigation.
3.13 Intangible Property. Except as set forth on Schedule 3.13 and,
------------------- -------------
as to the Founder, limited to the best of the Founder's knowledge, the Company
has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company and the Founder, all
permits, licenses and other authority, necessary to the conduct of its business
as presently constituted and conducted, and as proposed to be constituted and
conducted.
3.14 Trademarks, Patents, etc. The corporate names of the Company,
------------------------
and the trade names, trademarks, and service marks listed on Schedule 3.14 are
-------------
the only names and marks which are used by the Company in the operation of its
business. No claim has been asserted against the Company involving any conflict
or claim of conflict of its trade names, trademarks or service marks or with the
trade names, trademarks, service marks or corporate names of others, and, to the
best of the knowledge of the Company and the Founder and except as set forth on
Schedule 3.14, there is no basis for any such claim of conflict. Except as set
- -------------
forth on Schedule 3.14 and to the best of the knowledge of the Company and the
-------------
Founder, the
8
<PAGE>
Company is the sole and exclusive owner of its trade names, trademarks and
service marks and has the sole and exclusive right to use such trade names,
trademarks and service marks. The Company is the registered owner of the United
States and foreign patents listed on Schedule 3.14 and has applications pending
-------------
with the U.S. Patent Office and/or foreign patent offices for the patents listed
on Schedule 3.14 as being patents pending. The Company has no knowledge of any
-------------
adverse claim of any kind with respect to any of such patents or patent
applications, nor does it have any knowledge, or reason to know, that a patent
will not issue on any such patent application. Except as set forth on Schedule
--------
3.14 and to the best of the knowledge of the Company and the Founder, no process
- ----
used by the Company or any product manufactured or sold by the Company infringes
upon any patent, patent application, trademark, trade name or service mark of
any other party. To the best of the knowledge of the Company and the Founder and
except as set forth on Schedule 3.14, the Company is infringing, and there has
-------------
been no claim of infringement of, any third party's patent, license, trademark,
trade name, service mark, copyright or other proprietary right.
3.15 Insurance. The Company maintains insurance on all of its
---------
insurable properties as listed on Schedule 3.15 attached hereto. As to the
-------------
Founder, limited to the best of the Founder's knowledge, all such insurance
policies are in full force and effect and the Company is not in default of any
provision thereof. The Company has not received notice from any issuer of any
such insurance policies of its intention to cancel or refusal to renew any
policy issued by it.
3.16 Governmental Consent. As to the Founder, limited to the best of
--------------------
the Founder's knowledge, no permit, consent, approval or authorization of, or
filing with, any governmental regulatory authority or agency is required of the
Company in connection with the execution, delivery and performance of this
Agreement, or the consummation of the transactions contemplated hereby, except
as may be required by any federal or state securities laws, with which the
Company will comply.
3.17 Liabilities. As to the Founder, limited to the best of the
-----------
Founder's knowledge, the Company has no liabilities, whether related to tax or
non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, or otherwise, except: (a) as provided on
Schedule 3.17 (including the Company's unaudited internally prepared balance
- -------------
sheets as of January 31, 1996 and February 29, 1996 and the corresponding
statements of income, retained earnings and changes in financial position for
such periods included in Schedule 3.17; (b) legal and accounting expenses
-------------
incurred in connection with this Agreement in an aggregate amount estimated to
be not in excess of $20,000; or (c) liabilities which appear on the Company's
balance sheet as of December 31, 1995, which is attached hereto and included in
Exhibit G.
- ---------
3.18 Assets. The Company has good and marketable title to all of its
------
assets free and clear of all liens, charges, claims, encumbrances and defects of
any kind or character, except as set forth on Schedule 3.18 with respect to
-------------
encumbrances which do not encumber any material asset of the Company
(collectively, "Permitted Liens"). To the best of the knowledge of the Company,
as to which the Founder makes no representation or warranty, all equipment,
furniture and fixtures, and other tangible personal property of the Company are
in good operating
9
<PAGE>
condition and repair and do not currently require any repairs other than normal
routine maintenance to maintain such property in good operating condition and
repair.
3.19 Conflicting Interests. Except as set forth on Schedule 3.19 or
--------------------- -------------
Exhibit G, neither the Founder, nor as to the Founder, limited to the best of
- ---------
the Founder's knowledge any other director, officer, or any relative or
affiliate of any director or officer, nor, to the best of the knowledge of the
Company and the Founder, any employee or shareholder of the Company or any
relative or affiliate of any of the employees or shareholders (a) has any
pecuniary interest in any supplier or customer of the Company or in any other
business enterprise with which the Company conducts business or with which the
Company is in competition; or (b) is indebted to the Company for money borrowed.
3.20 No Payments to Shareholders or Others. Except as set forth on
-------------------------------------
Schedule 3.20 and, as to the Founder, limited to the best of the Founder's
- -------------
knowledge, there has not been any purchase or redemption of any shares of stock
of the Company by the Company or any transfer, distribution or payment by it,
directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payment of compensation for
services actually rendered at rates not in excess of the rates prevailing on the
Initial Closing Date, increases in compensation for Company executive officers
and other key employees, as determined by the Compensation Committee, and as to
other employees, as determined by the President of the Company, and (ii)
payments made in the ordinary course of business for goods and services in arm's
length transactions.
3.21 Absence of Material Changes. Since December 31, 1995:
---------------------------
(A) There has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or affairs of the
Company or any material physical damage or loss to any of its properties or
assets or to the premises occupied by it (whether or not such damage or loss is
covered by insurance);
(B) The Company has not taken any action outside of the ordinary
and usual course of its business, except as related to the transactions
contemplated hereby;
(C) The Company has not borrowed any money or become contingently
liable for any obligation or liability of others;
(D) The Company has paid all of its debts and obligations as they
became due;
(E) Except as set forth in Schedule 3.21E attached hereto and
--------------
except for the Notes to be issued hereunder, the Company has not incurred any
debt, liability or obligation of any nature to any party, except for obligations
arising from the purchase of goods or the rendition of services in the ordinary
course of business;
(F) The Company has not knowingly waived any right of substantial
value;
10
<PAGE>
(G) The Company has maintained its books, accounts and records in
the usual, customary and ordinary manner; and
(H) The Company has used its best efforts to preserve its
business organization intact, to keep available the services of its employees,
and to preserve its relationships with its customers, suppliers and others with
whom it deals.
3.22 Acquisition of Checkmate. Except as set forth in the Agreement
------------------------
in Principle regarding the Purchase of Assets of Checkmate Technologies, Inc.
("Checkmate"), dated as of May 2, 1994, and as to the Founder, limited to the
best of the Founder's knowledge, the Company's acquisition of all or
substantially all of the assets of Checkmate has been consummated and in full
force and effect, with no shareholders of either the Company or Checkmate
dissenting, and all of the assets, rights, privileges, powers and franchises of
Checkmate and all property, real, personal and mixed, of Checkmate are vested in
and are the property of the Company, free and clear of any encumbrances upon
their transfer from Checkmate to the Company and no creditor of Checkmate has
made or is threatening to make any claim of any kind against the Company or any
of its assets that formerly were assets of Checkmate.
3.23 Statements and Other Documents Not Misleading. No provision of
---------------------------------------------
this Agreement relating to the Company or any other document, schedule, exhibit
or other information furnished by the Company to the Investor in connection with
the execution, delivery and performance of this Agreement, or the consummation
of the transactions contemplated hereby, when taken together as a whole with all
other such statements, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact required to be
stated in order to make the statement, in light of the circumstances in which it
is made, not misleading.
IV. Representations and Warranties of Investor and Restrictions on
--------------------------------------------------------------
Transfer.
- --------
4.1 Representations and Warranties by the Investor. The Investor
----------------------------------------------
represents and warrants to the Company as follows:
(a) The Investor is acquiring the Securities for investment for its
own accounts and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands that the Securities
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or under any state securities or Blue Sky laws, and, as a
result thereof, are subject to substantial restrictions on transfer. The
Investor acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Securities Act and any applicable state
securities or Blue Sky laws, or exemptions from registration under the
Securities Act and such laws are available.
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the Investor,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
11
<PAGE>
(c) The Investor is domiciled in Pennsylvania, is a Pennsylvania
limited partnership and is an "accredited investor," as that term is defined in
Rule 501 of the Securities Act.
(d) The Investor is an "institutional investor," as that term is
defined in Regulation (S) 102.111 of the Pennsylvania Securities Act of 1972
(the "PA Securities Act"), and, accordingly, the offer and sale of the
Securities to the Investor is an exempt transaction pursuant to (S) 203(c) of
the PA Securities Act.
4.2 Legends. Each certificate or instrument representing the
-------
Securities shall be endorsed with the following legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND SUCH LAWS.
V. Continuation and Survival of Representations and Warranties. All
-----------------------------------------------------------
representations and warranties shall survive the consummation of the
transactions provided for in this Agreement for a period beginning on the date
hereof up to and including November 18, 1998 (thirty (30) months from the date
of this Agreement). No such representation or warranty shall be deemed to have
been waived, affected or impaired by any investigation made by any person or
persons.
VI. Affirmative Covenants of the Company and the Founder. Until the first
----------------------------------------------------
to occur of either (a) the Investor no longer owning at least 7.5% or more of
the Common Stock outstanding (assuming the exercise of the Warrants, the Harris
Options, the Deferral Options, the Horton Options and the Meridian Options and
all options with respect to all shares issuable under the ESOP and the
conversion of the Preferred Stock) (the "Minimum Stock Amount") or (b) the
consummation of a public offering of any of the Securities pursuant to one or
more registration statements filed under the Securities Act (or any successor
statute), yielding gross proceeds to the Company of at least $7,500,000 and
under which the Common Stock equivalents into which the Preferred Stock is
convertible are valued at a price of at least $1.31, after all dilution
adjustments (determined by such a registration statement or statements being
declared effective by the Securities and Exchange Commission, such Securities
being registered under Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (regardless whether the Company is subject to the
filing requirements of Section 15(d) of the Exchange Act) and such Securities
being listed on a national stock exchange or included for quotation on the
Nasdaq National Market) (a "Qualifying Public Offering"), the Company hereby
covenants (and with respect to Section 6.2, the Founder hereby covenants) to
comply with the following affirmative covenants, unless waived by the Investor,
if no shares of Preferred Stock are then outstanding, or if shares of Preferred
Stock are then outstanding, by Holders of at least three-fourths of the
Preferred Stock (with each holder of Preferred Stock entitled to that number of
votes equal to the Conversion Shares into which the Preferred Stock is
convertible) and
12
<PAGE>
Conversion Shares then outstanding, acting as a single class (the Investor
and/or such holders being the "Required Holders"):
6.1 Financial Statements. The Company shall furnish to the Investor
--------------------
and any other Holder of Preferred Stock the following financial statements,
reports and other documents, such financial statements to be prepared in
accordance with generally accepted accounting principles consistently applied,
certified by the Company's chief executive or financial officer:
(a) Beginning with the end of the Company's 1995 fiscal year, as soon
as available, and in any event within 90 days after the end of each fiscal year
of the Company, a balance sheet of the Company as of the end of such fiscal year
and related statements of operations, shareholders' equity and cash flows for
such fiscal year, all in reasonable detail and setting forth in comparative form
the figures as of the end of and for the previous fiscal year, which financial
statements shall have been audited, and shall be accompanied by an unqualified
opinion addressed to the Company from "Big Six" independent auditors or other
independent auditors that are reasonably satisfactory to the Investor, together
with a copy of such auditors' letter to Company management.
(b) As soon as available, and in any event within 20 days after the
end of each month, and within 30 days after the end of each fiscal quarter and
year of the Company, an unaudited balance sheet and unaudited statements of
operations, shareholders' equity and cash flows, together with a comparison of
such financial statements with the budget of the Company for such period.
(c) As soon as available, and in any event at least 60 days prior to
the end of each fiscal year of the Company, an annual budget and business plan
for the subsequent fiscal year, which budget and business plan shall include a
monthly breakdown of financial statements, which breakdown shall include the
underlying assumptions and a brief qualitative description of the Company's plan
by the Company's Chief Executive Officer in support of such budget and business
plan, which also shall have been approved and accepted by the Board of Directors
of the Company. If during the course of operations for any such month it becomes
apparent that deviations from such financial statements, budget and business
plan have occurred, the Company shall submit to its Board of Directors a
statement of such deviation within five business days from the date of the
Company's knowledge of such deviation (the "Statement"). The Statement shall
detail the manner in which a new financial projection deviates from the annual
business plan and the reason therefor. The Board of Directors shall have the
right to ask questions or request any other reasonable additional information
with respect to the Statement. Any and all subsequent deviations from such
financial statements shall be resubmitted to the Board of Directors of the
Company for approval and acceptance or for required further revision until such
approval and acceptance is obtained.
(d) In the event that the Company at any time hereafter shall be
required, by law or by generally accepted accounting principles, to consolidate
its financial statements with those of a subsidiary corporation, the Company
shall thereafter furnish the financial statements required by this Section 6.1
on a consolidated basis, and the quarterly and annual financial statements
specified above shall be furnished with consolidating financial statements.
13
<PAGE>
6.2 Board of Directors; Meetings. The Company shall maintain By-law
----------------------------
provisions satisfactory to the Investor in its sole discretion with respect to
the following provisions:
(a) Subject to the terms of the Amendment and this Agreement and
except as the By-Laws provide otherwise, the Board of Directors of the Company
shall consist of not less than two and not more than five members, of which the
holders of Preferred Stock, until such time as all shares of Preferred Stock
have been converted into shares of Common Stock and a Qualifying Public Offering
has occurred, shall have the right to elect one member, or if there are then no
holders of Preferred Stock, until such time as a Qualifying Public Offering has
occurred, the Founder shall vote his shares of Common Stock in favor of one
nominee for director nominated by the Investor. As of the date hereof, the
directors elected by the holders of the Common Stock shall be the Founder,
Richard S. Garnick and Frederick J. Beste III (who has been nominated by the
Investor (the "Designated Director")).
(b) The Company shall permit the Designated Director to invite
one or more additional individuals to any and all meetings of the Board of
Directors or of the shareholders of the Company; provided, however, that the
-------- -------
individual invited must be a director, officer, consultant or employee of the
Investor. Such individuals may participate in discussions and express their
views on matters before the Board, but shall not be entitled to vote. Such
attendance may be either in person or by telephone.
(c) The Company shall establish a Compensation Committee of the
Board of Directors, consisting of not less than two and not more than three
members, of which one shall be a Board member elected by the Holders of the
Preferred Stock, or if there are then no such Holders, the Founder shall vote
his shares in favor of a nominee for such Committee identified and nominated by
the Investor. The Compensation Committee shall review and approve all employee
compensation policies and programs and shall approve the initial and future
compensation of all executive officers and other key employees of the Company.
To the extent the Board of Directors establishes any other committees, one
member of any such committee shall be a Board member elected by the Holders of
the Preferred Stock or, if there are then no such Holders, the Founder shall
vote in favor of a nominee for such Committee as identified and nominated by the
Investor.
6.3 Additional Information.
----------------------
(a) The Company shall, as promptly as possible (but, in any
event, within ten days) after obtaining knowledge of the occurrence of any
"Default," as such term is defined in Section 2.3(d) above), or any other
material adverse development or event, furnish the Investor with a detailed
written notice of such default or event and the proposed response of Company
management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the Investor
with notice of all material actions, suits and proceedings before any court or
governmental agency, commission, board, bureau, department or instrumentality,
domestic or foreign, affecting the Company.
14
<PAGE>
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or directors of the
Company, and all written consents taken by the shareholders and/or directors of
the Company.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the same,
furnish the Investor with all reports and financial statements that the Company
shall send or make available to the shareholders or the directors of the Company
or the Securities and Exchange Commission.
(e) The Company shall, as promptly as possible (but, in any
event, within ten days) after the occurrence thereof, furnish the Designated
Director with prompt written notice of all material developments and
transactions outside of the ordinary course of business or which might otherwise
have a significant effect on the Company's business prospects or financial
condition or on the Investor's investment in the Securities.
(f) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the condition
of operations, financial or otherwise, of the Company as the Investor may, from
time to time, reasonably request.
(g) The Investor agrees not to disclose to third parties any
confidential information concerning the Company which is furnished to the
Investor by the Company except as required by law, legal process or its
fiduciary duty to report financial and business information to its partners,
shareholders, directors or affiliates and to such other persons as the Investor,
in the exercise of its prudent business judgment, may select and shall use
reasonable commercial efforts to have such persons maintain such confidentiality
of the confidential information. The term "confidential information" does not
include information which (i) was or becomes generally available to the public
other than as a result of a disclosure by the Investor, or (ii) was or becomes
available to the Investor on a non-confidential basis from a source other than
the Company, provided that such source is not bound by a confidentiality
agreement with the Company.
6.4 Inspection. The Company shall permit, at any reasonable time and
----------
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.5 Life Insurance. The Company shall maintain at its expense, a key
--------------
man life insurance policy or policies, with an insurance company or association
satisfactory to the Investor, on the life of the Founder, in the amount of
$500,000 payable to the Investor, and shall make its best efforts to obtain such
insurance in the amount of $750,000 and the amount of the insurance so obtained
shall not be decreased or cancellable other than due to the non-payment of
premiums or prior repayment of all of the Notes and the Company's promissory
notes issued to the Investor pursuant to the Prior Purchase Agreement (as
defined in Section 3.3) (collectively, the "Prior Notes"). Assuming issuance of
such a life insurance policy or policies as to which the
15
<PAGE>
Investor is the beneficiary, upon the death of the Founder, the Investor shall
accelerate all of the Notes and the Prior Notes it then holds and the proceeds
of such policy shall be used to repay all then outstanding principal and
interest under the Notes and the Prior Notes, to the extent of such policy or
policies. To the extent the proceeds of such life insurance policy exceed all
amounts due under the Notes and the Prior Notes, the Investor shall remit to the
Company such excess remaining after all amounts due on the Notes and the Prior
Notes have been fully satisfied.
6.6 Compliance with Articles of Incorporation and By-laws. The
-----------------------------------------------------
Company shall perform and observe all the obligations and provisions set forth
in its Articles of Incorporation (including the Amendment) and By-laws.
6.7 Maintain Rights and Facilities. The Company shall maintain and
------------------------------
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
6.8 Books and Records. The Company shall make and keep books,
-----------------
records and accounts, which, in reasonable detail, accurately and fairly reflect
its transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (a) transactions are
executed in accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of the financial
statements required herein and to maintain accountability for assets; and (c)
access to assets is permitted only in accordance with management's general or
specific instructions and recorded assets are compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
difference.
6.9 Other Insurance. The Company shall maintain insurance against
---------------
such risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.10 Contracts and Agreements. The Company shall comply in all
------------------------
material respects with the provisions of all material contracts, indentures,
instruments and agreements to which it is a party or by which the Company or its
properties are bound, and with all other material obligations which the Company
incurs or to which it becomes subject.
6.11 Taxes. The Company shall pay and discharge when due all federal,
-----
state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
--------
however, that the Company may in good faith contest any tax, assessment,
- -------
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.12 Compliance with Laws. The Company shall comply with all laws,
--------------------
rules and regulations of all governmental authorities and agencies applicable to
the Company, its
16
<PAGE>
business or its properties, the failure to comply with which might have a
material adverse effect on the Company.
VII. Negative Covenants. The Company hereby covenants that, until the
------------------
first to occur of (a) the Investor no longer owning the Minimum Stock Amount and
(b) the consummation of a Qualifying Public Offering, the Company shall comply
with the following negative covenants unless such covenant is waived by the
Required Holders:
7.1 Conduct of Business. The Company shall not:
-------------------
(a) (i) Merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation or other
entity or entities; (ii) reorganize, dissolve or liquidate the Company, or adopt
any plan of reorganization, dissolution or liquidation of the Company; (iii)
sell, assign or otherwise dispose of all or any substantial portion of its
assets; or (iv) acquire all or any substantial portion of the voting stock or
assets of another corporation or other entity or entities;
(b) Except as otherwise required or permitted by this Agreement
(including Section 7.11), create, authorize or issue any additional shares of
capital stock (other than shares issuable upon exercise of options issued under
the ESOP, the Harris Options, the Deferral Options, the Horton Options and the
Meridian Options), or any rights to acquire any shares of capital stock or any
other security; or repurchase any shares of its capital stock except from
employees upon termination of employment or pursuant to or as permitted by the
Shareholders' Agreement.
(c) Amend its Articles of Incorporation (including as amended by
the Amendment) or By-laws.
(d) Effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the conduct of
the business of the Company, as such business is conducted and proposed to be
conducted.
7.2 Liens and Encumbrances. Except for Permitted Liens (as defined
----------------------
in Section 3.18), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent. This Section 7.2 may be waived by
action of the Board of Directors, without the consent of the Required Holders,
provided that the Designated Director is included in the majority of directors
voting to permit such waiver.
7.3 Dividends. The Company shall not declare or pay any dividend
---------
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than the Preferred Stock
issued upon exercise of the Warrants issued hereunder or as permitted by the
Amendment with respect to payment of dividends on the Preferred Stock and the
Common Stock or as permitted by the Notes or as contemplated by the
Shareholders' Agreement.
17
<PAGE>
7.4 Agreements. The Company shall not enter into any contract,
----------
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Notes or to
redeem shares of the Preferred Stock, or which otherwise restricts, in any
material respect, the Company's ability to perform under this Agreement.
7.5 Insider Transactions. The Company shall not enter into any
--------------------
transaction with any of its officers, directors or shareholders, except for the
Employment Agreement and the Shareholders' Agreement, and other employment
related transactions on reasonable and customary terms, unless: (a) such
transaction is an arm's-length transaction on fair and reasonable terms and (b)
the Board of Directors of the Company approves such transactions with the
Designated Director included in the majority of the Board approving such
transactions, after full disclosure of the facts.
7.6 Capital Expenditures. The Company shall not incur, in any
--------------------
twelve-month period, capital expenditures (including expenditures for
capitalized leases) in excess of $150,000 or any single capital expenditure in
excess of $60,000. This Section 7.6 may be waived by action of the Board of
Directors, without the consent of the Required Holders, provided that the
Designated Director is included in the majority of directors voting to permit
such waiver.
7.7 Payments; No Default. The Company shall make all required
--------------------
payments of rent, taxes, debts and other material obligations of the Company
promptly when due. The Company shall not be in default with respect to any
material contracts, agreements or instruments to which the Company is a party or
by which the Company is bound.
7.8 Material Contracts. Other than renewing the Employment
------------------
Agreements on their current terms and conditions, the Company shall not, during
any fiscal year of the Company, enter into material contracts pursuant to which
the Company would incur liabilities in excess of $25,000 individually or $50,000
in the aggregate, unless the Board of Directors of the Company has previously
approved the execution of such contract. Notwithstanding the foregoing, the
aforementioned dollar limitations shall be subject to the review of the Board of
Directors of the Company.
7.9 Compensation. The Company shall pay its officers and directors
------------
such levels of compensation and bonuses as the Compensation Committee of the
Board of Directors may from time to time specify, or as provided in the
Employment Agreement; provided, however, that the Company may make up to 10% of
-------- -------
its annual pre-tax profits available as bonuses payable to Company employees, at
the sole discretion of Company management; provided further, that the Company's
----------------
management may elect to pay such bonuses quarterly so long as the aggregate
amount of such quarterly bonuses paid does not exceed 10% of the Company's
pretax profits for the year in which such bonuses are paid.
7.10 Acquisitions. The Company shall not acquire the stock or all or
------------
substantially all of the assets or business of any other entity in any form of
transaction.
7.11 Limitations on Raising Additional capital. The Company, the
-----------------------------------------
Investor and the Founder acknowledge that from and after the Initial Closing,
the Company may be seeking
18
<PAGE>
capital in addition to receiving the balance of the Purchase Price, from both
non-profit or non-venture capital sources, such as The Ben Franklin Partnership
or various local or regional economic development grants, authorities or
programs administered by various governmental or quasi-governmental agencies
(collectively, "Non-Private Sources"), as well as from strategic, corporate
sources (collectively, "Corporate Sources"). Notwithstanding any other provision
of this Agreement or the Amendment to the contrary, which otherwise might have
prohibited a transaction to raise capital from either a Non-Private Source or a
Corporate Source, the Company shall be permitted to raise capital from a Non-
Private Source, and the Company shall be permitted to raise equity capital from
a Corporate Source if the Corporate Source shall pay a price per share of Common
stock equivalent of not less than 180% of the price per share of Common Stock
equivalent payable by the Investor pursuant to the terms of the Subsequent
Warrants.
VIII. Registration and Related Rights.
-------------------------------
8.1 Piggyback Registration.
----------------------
(a) As used in this Section 8, "Registration Stock" shall mean:
------------------
the Conversion Shares (as defined in Section 1.4), and any shares of Common
Stock issued in respect of the Preferred Stock or the Conversion Shares upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event; provided, however, that Registration Stock shall not include any such
-------- -------
shares disposed of pursuant to one or more registration statements under the
Securities Act, or which have been sold pursuant to Rule 144 under the
Securities Act or which have otherwise been sold without registration under the
Securities Act. For purposes of this Section 8, any record holder of securities
convertible into Registration Stock (or exercisable for securities which are
convertible into Registration Stock) shall be deemed to be the holder of the
Registration Stock issuable upon such exercise and/or conversion.
(b) If the Company shall seek to register under the Securities Act or
qualify any of the securities holdings of the Company or any of its shareholders
(except in connection with any stock option plan, stock purchase plan, savings
or similar plan or an acquisition, merger or exchange of stock, to be registered
on Forms S-4, S-8 or any successor forms under the Securities Act) and if the
form of registration statement proposed to be used otherwise may be used for the
registration of the Registration Stock (as herein defined), then, on each such
occasion, the Company shall furnish the Investor with at least 30 days prior
written notice thereof. At the written request of the Investor, given within 20
days after the receipt of such notice, the Company will use its best efforts to
cause all of the Registration Stock for which registration shall have been
requested by the Investor to be included in such registration statement. In the
event that the proposed registration by the Company is, in whole or in part, an
underwritten public offering of securities of the Company, and the managing
underwriter determines and advises in writing that the inclusion of all
Registration Stock proposed to be included in the underwritten public offering
and other issued and outstanding shares of Common Stock proposed to be included
therein by persons other than (i) holders of Registration Stock or (ii) holders
of Subordinate Stock (as defined in Section 8.4) with rights equal to those of
the holders of Registration Stock ("Other Registration Stock) (such other shares
which are not Registration Stock or Other Registration Stock being the "Other
Shares") would interfere with the successful marketing (including pricing) of
the securities, then the number of shares of
19
<PAGE>
Registration Stock, Other Registration Stock and Other Shares to be included in
such underwritten public offering shall be reduced first, pro rata among the
holders of Other Shares; second, if necessary, pro rata among the holders of
Registration Stock and Other Registration Stock combined, based upon the number
of shares requested by holders thereof to be registered in such underwritten
public offering; and lastly, if necessary, among the Company's shares requested
by the Company to be registered; provided, however, that the holders of
-------- -------
Registration Stock do not then elect to exercise their rights under Section 8.2;
and, further provided, that in no event, without the consent of the holders of
at least 67% of the Registration Stock, the percentage of the Registration Stock
that is included in such registration statement shall not be less than the
percentage of the securities of any other shareholder included therein. In the
event that the Company offers any of its securities in an offering exempt from
registration under the Securities Act pursuant to Regulation A, the Company will
provide to the holders of Registration Stock rights comparable to those provided
herein.
8.2 Demand Registration.
-------------------
(a) If at any time, the Company shall be requested in writing by
the holders of not less than 67% of the Registration Stock to effect the
registration under the Securities Act of at least 33 1/3% of the Registration
Stock, the Company shall promptly give written notice of such proposed
registration to all record holders of Registration Stock. Such holders shall
have the right, by giving written notice to the Company within 30 days from
receipt of the Company's notice, to elect to have included in such registration
such of their Registration Stock as such holders may request in such notice of
election. Thereupon, the Company shall, as expeditiously as possible, use its
best efforts to effect the registration, on a form of general use under the
Securities Act, of all shares of Registration Stock which the Company has been
requested to register; provided, however, that if the holders of not less than
-------- -------
67% of the Registration Stock shall so request (and at least 50% of the
Registration Stock is being registered), the Company shall file such
registration statement pursuant to Rule 415 or any successor rule or regulation
under the Securities Act, so as to permit the continuous or delayed offering of
the Registration Stock in accordance with the intended method of disposition
specified in the notice of the exercise of rights under this Section 8.2(a), to
the extent such offering qualifies under such rule or regulation, but in no
event shall the Company be required to maintain the effectiveness of such
registration statement beyond a two year period. The Company shall be obligated
to cause to become effective one registration statement pursuant to which
Registration Stock is sold under this Section 8.2(a).
(b) In addition and not in limitation of the rights set forth in
Sections 8.1(b) and 8.2(a), at such time as the Company shall have qualified for
the use of Form S-2 or Form S-3 in an offering solely for the accounts of
persons other than the Company (or any similar form or forms promulgated by the
Securities and Exchange Commission), the holders of not less than 67% of the
Registration Stock shall have the right to request an unlimited number of
registrations on Form S-2 or Form S-3 or other similar forms. Such holders
shall have the right, by giving written notice to the Company within 20 days
from receipt of the Company's notice, to elect to have included in such
registration such of their Registration Stock as such holders may request in
such notice of election. Thereupon, the Company shall, as expeditiously as
possible, use its best efforts to effect the registration, on Form S-2 or Form
S-3 of all shares of Registration Stock which the Company has been requested to
register. The Company shall not
20
<PAGE>
be required to effect any such registration more than once every twelve months.
Registrations effected on Form S-2 or Form S-3 shall not be considered to be
demand registrations pursuant to Section 8.2(a) hereof.
(c) The Company may include in a registration requested under this
Section 8.2 any additional authorized shares of the Common Stock of the Company,
whether or not issued, for sale by the Company or for sale by others; provided,
--------
however, that such shares shall not be included to the extent that the holders
- -------
of a majority of the shares of Registration Stock included therein determine in
good faith that the inclusion of such shares will interfere with the successful
marketing of the shares of Registration Stock to be included therein; and,
provided, further, that, upon the election of the holders of a majority of the
- -------- -------
shares of Registration Stock included therein, or if the number of shares to be
so included equals or exceeds the number of shares of Registration Stock
included therein by the holders of Registration Stock, such registration shall
be deemed to be a registration pursuant to Section 8.1(b) hereof.
(d) The underwriter and the terms of the underwriting for any
registration pursuant to this Section 8.2 shall be mutually acceptable to the
Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to the
contrary:
(i) The Company reserves the right to delay any such
registration pursuant to Section 8 for a period of not more than sixty days, or
to withhold efforts to cause such registration statement to become effective for
a period of not more than sixty days, if the Board of Directors of the Company
determines in good faith that such registration might (A) interfere with or
affect the negotiation or completion of any material transaction that is being
contemplated by the Company, or (B) involve initial or continuing disclosure
obligations materially adverse to the best interest of the Company's
shareholders. If, after a registration statement becomes effective, the Company
advises the holders of the Registration Stock covered by such registration
statement that the Company considers it appropriate for the registration
statement to be amended, the holders of such shares shall suspend any further
sales of their registered shares until the Company advises them that the
registration statement has been amended. The time periods referred to in this
Article 8 shall be extended for an additional number of business days during
which the rights to sell shares was suspended.
(ii) The Company shall not be obligated to file a
registration statement pursuant to Section 8.2 within three months after the
effective date of any registration under which piggyback rights were granted
pursuant to Section 8.1.
8.3 Further Obligations of the Company. Whenever the Company is
----------------------------------
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to do the
following:
(a) Prepare for filing and file with the Securities and Exchange
Commission promptly thereafter a registration statement and such amendments and
supplements to said registration statement and the prospectus used in connection
therewith as may be
21
<PAGE>
necessary to keep said registration statement effective and to comply with the
provisions of the Securities Act with respect to the sale of securities covered
by said registration statement for the period necessary (but, other than as
otherwise provided in Section 8.2(a), in no event more than nine months) to
complete the proposed public offering;
(b) Furnish to each selling holder so requesting such copies of
preliminary and final prospectus and such other documents as said holder may
reasonably request to facilitate the public offering of such holder's
Registration Stock;
(c) Use its best efforts to register or qualify the Registration
Stock covered by said registration statement under the securities or Blue Sky
laws of such jurisdictions as not less than 60% of the holders of Registration
Stock may reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and do any
and all other acts and things that may be reasonably necessary or advisable to
enable such seller to consummate the disposition in such jurisdictions of its
Registration Stock covered by such registration statement, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not, but
for the requirements of this subdivision (c), be obligated to be so qualified,
or to subject itself to taxation in any such jurisdiction, or to consent to
general service of process in any such jurisdiction;
(d) Furnish to the selling holders, and any underwriters or
broker-dealers through whom the Registration Stock may be sold, an opinion or
opinions of counsel for the Company and a "cold comfort" letter or letters of
the independent auditors for the Company, in form and substance customary for
similar offerings;
(e) Permit each selling holder or the selling holder's counsel
or other representatives, at the selling holder's expense, to inspect and copy
such corporate documents and records as may reasonably be requested by them;
(f) If so requested, furnish to each selling holder a copy of
all documents filed and all correspondence to or from the Securities and
Exchange Commission in connection with any such offering.
(g) Immediately notify each seller of Registration Stock covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, upon discovery that, or
upon the happening of any event as a result of which, the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and at the request of any such seller or
holder, prepare and furnish to such seller and holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such Registration Stock,
such prospectus shall not include 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 not misleading in the light of the circumstances then
existing;
22
<PAGE>
(h) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of at least twelve months, but not more
than eighteen months, beginning with the first month of the first fiscal quarter
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of subsection 11(a) of the Securities
Act;
(i) Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration statement
from and after a date not later than the effective date of such registration
statement; and
If requested by the company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Commission in connection therewith.
8.4 Registration Rights Equal or Superior. The Company shall not
-------------------------------------
grant any registration rights or register any securities for the account of any
person other than holders of Registration Stock unless permitted to do so by the
written consent of the Required Holders; provided, however, that the Company
-------- -------
shall be entitled to grant registration rights or register any securities for
the account of any person other than holders of Registration Stock without the
consent of the Designated Director as long as such rights applicable to such
securities are made subject and subordinate to, or no more than equal to the
rights of the holders of Registration Stock under Sections 8.1 and 8.2 (such
securities being the "Subordinate Shares").
8.5 Expenses, Etc. All expenses in connection with the preparation
-------------
and filing of any registration statement under this Section 8, any registration
or qualification under the securities or Blue Sky laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with Blue Sky or state securities
laws, (iii) other fees or expenses expressly applicable to securities being sold
by the selling shareholder and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 Indemnification. The Company shall indemnify the selling holders
---------------
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock were registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse the
selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such
23
<PAGE>
selling holders in connection with investigating or defending against such loss,
claim, damage, liability or action; except insofar as such losses, claims,
damages, liabilities or expenses are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such selling
holders expressly for use therein. In connection with any such registration
statement, the selling holders of Registration Stock will furnish the Company in
writing such information as may reasonably be requested by the Company for use
in any such registration statement or prospectus and will indemnify the Company,
its directors and officers, and, to the extent required in any agreement with
any underwriter or broker-dealer, each such underwriter or broker-dealer and
each person, if any, who controls the Company or any underwriter or broker-
dealer (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities, expenses and actions in respect thereof (under the
Securities Act or common law or otherwise) resulting from any untrue statement
or alleged untrue statement of a material fact required to be stated in such
registration statement or prospectus and necessary to make the statements
therein not misleading; and will reimburse the Company for any legal or other
out-of-pocket expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; but only to the extent that such untrue statement or omission was
contained in information so furnished in writing by the selling holders of
Registration Stock expressly for use therein, and only to the extent of proceeds
received by the selling holders of Registration Stock in the offering. The
Company further agrees and the selling shareholder shall agree that, in
connection with any underwritten public offering, the Company also will enter
into customary contribution arrangements with the selling holders of
Registration Stock and the underwriters or broker-dealers through whom the
Registration Stock may be sold, with respect to situations in which
indemnification is potentially unavailable.
8.7 Withdrawal. If a public offering is not completed within nine
----------
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1(b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company reserves the right, at its option, to
withdraw from registration any securities offered by the Company which have not
been sold during such period, provided that no securities offered by any holder
of Registration Stock shall be withdrawn without the consent of the holders of
50% of the Registration Stock.
8.8 Exchange Act. As promptly as possible following receipt of a
------------
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the Exchange Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on Nasdaq or the Nasdaq
National Market, as requested, and shall keep effective such registration and
maintain such listing or inclusion, and shall use its best efforts timely to
file such information, documents and reports as the Securities and Exchange
Commission may require or prescribe that the Company file in connection
therewith. The Company will, at the request of any holder of Registration
Stock, advise such holder in writing as to whether all reports required to be
filed by the Company under Section 13 of the Exchange Act during the 12 months
preceding such request (or for such shorter period as the Company was required
to file such reports) have been filed, and any other information which
24
<PAGE>
the holder may reasonably require in order to comply with Rule 144 under the
Act, or any other comparable rule, as then in effect.
IX. Preemptive Rights.
-----------------
9.1 Until the first to occur of (a) the Investor no longer owning the
Minimum Stock Amount or (b) the consummation of a Qualifying Public Offering, if
at any time after the date of this Agreement, the Company issues or proposes to
issue any equity securities, other than (a) the securities whose issuance is
contemplated by this Agreement; (b) up to an aggregate of 490,730 shares of
Common Stock issuable upon exercise of options granted under the ESOP; (c) up to
an aggregate of 123,700 shares of Common Stock issuable upon exercise of the
Harris Options, an aggregate of 144,438 shares of Common Stock issuable upon
exercise of the Deferral Options, an aggregate of 89,713 shares of Common Stock
issuable upon exercise of the Horton Options, an aggregate of 100,000 shares of
Common Stock issuable upon exercise of the Meridian Options; and (d) shares of
Common Stock issued upon the exercise, exchange or conversion of any security as
to which the Investor had an opportunity to exercise its rights under this
Section 9 (an "Issuance"), the Investor shall have the right to purchase up to
its Proportionate Percentage (as defined below) of the type of securities issued
or proposed to be issued in such Issuance on the same price and terms as the
Issuance (to the extent such price and terms are cash prices and terms). The
Investor's "Proportionate Percentage" shall be that percentage equal to the
ratio which (x) the number of shares of outstanding Common Stock then owned by
the Investor bears to (y) the aggregate number of shares of outstanding Common
Stock then owned by all shareholders of the Company. For purposes solely of the
computation required under clauses (x) and (y) above, the Investor holding
Preferred Stock shall be treated as having converted all of its Preferred Stock
into shares of Common Stock at the rate at which such Preferred Stock is
convertible at the time of delivery by the Company of the Option Notice (as
defined in Section 9.2), assuming that all outstanding Preferred Stock held by
other Holders of Preferred Stock shall likewise be deemed converted.
9.2 In the event of an Issuance, the Company shall deliver to the
Investor a written notice describing such Issuance, specifying the Investor's
pro rata share and stating the purchase price and other terms of such Issuance
(the "Option Notice"). For a period of 45 days from the receipt of the Option
Notice, the Investor shall have the right to elect, by written notice to the
Company, to purchase all or any portion of its pro rata share of such
securities.
X. Participation Rights.
--------------------
10.1 In addition to and not in limitation of the provisions of the
Shareholders' Agreement, the Founder hereby agrees that until the first to occur
of (a) the Investor no longer owning the Minimum Stock Amount or (b) the
consummation of a Qualifying Public Offering, he shall not sell any of the
shares of the capital stock of the Company held by him, unless such sale is in
accordance with the terms and conditions of this Section 10.
10.2 Until the consummation of a Qualifying Public Offering, in the
event that the Founder desires to sell some or all of the shares of the capital
stock of the Company held by him (the "Offered Shares") in a private transaction
then the Founder shall obtain a written offer
25
<PAGE>
(the "Offer") to purchase such Offered Shares solely for cash to be paid in full
at the closing of each such transaction, and shall forward a copy of the Offer
to the Company and to the Investor.
10.3 If, within 30 days of receipt of the Offer, the Company notifies
the Founder that it will purchase all of the Offered Shares, then the Founder
shall sell such shares to the Company upon the terms and conditions of the
Offer.
10.4 If the Company declines to purchase all or any portion of the
Offered Shares in accordance with Section 10.3 above, it shall promptly notify
the Investor of such decision. If, within 30 days of receipt of such notice,
the Investor notifies the Founder that it will purchase all or any portion of
the remaining offered Shares, then the Founder shall sell such shares to the
Investor upon the terms and conditions of the Offer.
10.5 If, after giving effect to Sections 10.3 and 10.4 above, the
Company and the Investor fail to purchase all of the Offered Shares, then the
Founder shall be entitled to sell such shares on the terms set forth in the
Offer for a period of 30 days, commencing upon the expiration of the 30-day
period referred to in Section 10.4 above, subject to the provisions of Section
10.6 below.
10.6 If, after giving effect to Sections 10.3 and 10.4 above, the
Company and the Investor do not agree to purchase all of the Offered Shares,
then the Founder shall use Founder's best efforts to interest the offeror (the
Offeror") in purchasing such shares as the Investor gives notice that it desires
to sell in such sale (the "Additional Shares"), as well as the Offered Shares.
If the Offeror does not wish to purchase the full amount of the Additional
Shares, then the Investor shall be entitled to sell in the transaction up to
that number of the Additional Shares which, when divided by the total number of
Additional Shares as to which the Investor has given notice that it desires to
sell in the transaction, would be equal to the number of shares which the
Offeror has agreed to purchase, divided by the aggregate number of shares which
the Founder and the Investor sought to sell to the Offeror.
10.7 Other than as set forth above, without the prior written consent
of the Investor, the Founder may not make any transfer of such Founder's shares
of the capital stock of the company in any transaction not permitted by the
Shareholders' Agreement.
XI. Events of Default.
-----------------
Each of the following shall constitute an Event of Default under this
Agreement:
11.1 Default on Payments to the Investor. The failure of the Company
-----------------------------------
to make (a) within ten days of the date when due, any principal or interest
payment on any Note, any dividend payment upon the Preferred Stock on the date
when due, or any other payment required to be made on the date when due (whether
under the terms of the Notes, the Prior Notes, the Preferred Stock or the
Amendment) in connection with the redemption of the Preferred Stock or under the
terms of the Notes or the Prior Notes, or (b) failure of the Company to make any
other payment upon any other note, guaranty or obligation of the Company to the
Investor or held by the Investor, or required hereunder, within 30 days after
written notice from the Investor to the Company; regardless of whether any such
failure to make the payments described in (a) and (b) above is due to a legal
inability or incapacity of the Company to make any such payments.
26
<PAGE>
11.2 Information, Representations and Warranties. Any information
-------------------------------------------
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
11.3 Covenants and Agreements. The failure of the Company to observe,
------------------------
perform or abide by any other covenant, warranty, agreement or provision of this
Agreement, the Prior Purchase Agreement, the Amendment, the Notes, the Prior
Notes, the Warrants, the Prior Warrants, the Preferred Stock, or any of the
documents executed by the Company in connection herewith or therewith or
referred to herein or therein, which failure is not cured to the Investor's
reasonable satisfaction within 30 days (the "Cure Period") after written notice
from the Investor to the Company of its occurrence; provided, however, that no
-------- -------
Event of Default shall be considered to have occurred if the failure is not the
failure to pay money and is of such a nature that it reasonably cannot be cured
within the Cure Period, but if it is curable and the Company in good faith
begins efforts to cure it within the Cure Period and continues diligently to do
so, the Company shall have an additional 30 days from the date on which the Cure
Period ends to effect the cure. If the failure continues after the expiration
of such additional 30 day period, regardless whether such failure might be
curable at some time beyond such additional 30 day period, such failure shall
nevertheless be considered an Event of Default.
11.4 Default on Other Obligations. The occurrence of a material
----------------------------
default following the expiration of any applicable cure period, if any, in any
material obligation of the Company or any violation of law or refusal of
regulatory permission which has a material adverse effect on the Company's
operations.
11.5 Certain Events As To The Company. The Company or any of its
--------------------------------
material subsidiaries shall (A) admit in writing its inability to pay its debts
generally as they become due; (B) file a petition or answer or consent seeking
relief under the Federal Bankruptcy Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy or insolvency law
or other similar law, not discharged or vacated or set aside or stayed within 45
days; (C) consent to the institution of proceedings under any law referenced in
(B) above, not discharged or vacated or set aside or stayed within 45 days, or
to the filing of any such petition, not discharged or vacated or set aside or
stayed within 45 days or to the appointment or taking possession of a receiver,
liquidator, assignee, trustee, custodian (or other similar official) of the
Company or any subsidiary or of any substantial part of their property; (D) fail
generally to pay its debts as such debts become due, or take corporate action in
furtherance of any such action; (E) make an assignment for the benefit of its
creditors; or (F) fail to meet any of its material monetary obligations with the
exception of trade payables, in the amounts and for the periods set forth on
Schedule 2.2 attached hereto; provided, however, that no Event of Default shall
- ------------ -------- -------
be considered to have occurred under subsection 11.5(F) if the failure to meet
such material monetary obligations is due to a good faith dispute between such
parties, which dispute shall continue for no more than 30 days; provided
--------
further, that upon the expiration of such 30 day period (the "Expiration Date"),
- -------
the Company shall have, upon notice to the Investor an additional 30 day period
to resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time beyond
27
<PAGE>
such additional 30 day period, such failure under subsection 11.5(F) shall
nevertheless be considered an Event of Default.
11.6 Certain Events As To The Founder. The Founder dies, is disabled
--------------------------------
for a period in excess of 120 days during which the Founder is unable to perform
his duties as an officer of the Company for a full eight hour day (the
"disability" of the Founder), terminates his employment with the Company or has
his employment terminated by the Company.
XII. Rights of Investor Upon Default.
-------------------------------
12.1 Rights on Default. If there shall occur and be continuing an
-----------------
Event of Default as defined in the foregoing Section 11, the Investor, or if
there are then Holders of Preferred Stock, the Holders of at least 75% of the
Preferred Stock may, by written notice to the Company, declare the Company to be
in default hereunder, whereupon: (i) if the Investor or the Holders of at least
75% of the Preferred Stock, as applicable, so specifies in such notice, any
Notes then outstanding, the balance of all accrued dividends upon the Preferred
Stock, and all other indebtedness of the Company to the Investor now or
hereafter incurred, shall become immediately due and payable without further
demand, presentation or notice of any kind; and (ii) the Founder hereby agrees
that, at such time, he shall vote his shares in such a manner and take such
actions as may be necessary or advisable, in the reasonable opinion of the
Investor or the Holders of at least 75% of the Preferred Stock, to best ensure
the repayment of the Notes and the Prior Notes and payment of all such accrued
dividends upon the Preferred Stock and repayment of all such other indebtedness
to the Investor.
12.2 Additional Rights. The Investor shall have such additional
-----------------
rights and remedies as are contained herein, in the Notes, the Warrants, the
Preferred Stock, the Amendment, or in any other documents and agreements
delivered or given in connection herewith, and all rights which it might have at
law or equity, all of which rights and remedies shall be cumulative.
XIII. Further Assurances. The Company and the Investor agree to execute
------------------
and deliver all such other instruments and take all such other actions as any
party may reasonably request from time to time before or after the Initial or
Subsequent Closing Date and without payment of further consideration, in order
to effectuate the transactions provided for herein. The parties shall cooperate
fully with each other and with their respective counsel and accountants in
connection with any steps required to be taken as part of their respective
obligations under this Agreement.
XIV. Miscellaneous.
-------------
14.1 Waivers and Amendments. No waiver by either party of any
----------------------
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
28
<PAGE>
14.2 Governing Law. This Agreement and all questions relating to its
-------------
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
14.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
14.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and supersedes all prior agreements, understandings, inducements or conditions,
express or implied, oral or written, except as herein contained. The express
terms hereof control and supersede any course of performance and/or usage of
trade inconsistent with any of the terms hereof.
14.5 Notices. All notices, requests, demands and other communications
-------
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly made and received when personally served, or when
mailed by first class mail or overnight, by courier service such as Federal
Express, postage prepaid, or telecopied with answer back receipt and hard copy
sent in the manner set forth above, addressed as set forth below:
(i) If to the Company or the Founder, then
to:
Quadrant International Inc.
170 Warner Road
Suite 102
Wayne, PA 19087
Attn: President
with a copy, given in the manner prescribed above, to:
Cozen & O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
Attn: Michael J. Heller, Esquire
(ii) If to NEPA II, then to:
NEPA Venture Fund II, L.P.
125 Goodman Drive
Bethlehem, PA 18015
29
<PAGE>
Attn: Frederick J. Beste III
with a copy, given in the manner prescribed above, to:
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Attn: Raymond D. Agran, Esquire
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
14.6 Payment of Expenses. All reasonable legal fees and expenses
-------------------
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof shall be paid by the Company.
14.7 Brokers. Each party represents that it has not retained any
-------
finder or broker in connection with the transactions contemplated by this
Agreement and will indemnify, defend and hold the other party harmless from any
claim based on breach of this representation.
14.8 Delays or Omissions. It is agreed that no delay or omission to
-------------------
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing, and that all remedies, either
under this Agreement or by law or otherwise, shall be cumulative and not
alternative.
14.9 Titles. The titles of the Sections of this Agreement are for
------
convenience of reference only and are not to be considered in construing this
Agreement.
14.10 Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
14.11 Execution; Counterparts. This Agreement may be executed in any
-----------------------
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
30
<PAGE>
14.12 Exhibits; Schedules. All Exhibits and Schedules attached
-------------------
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
Attest: QUADRANT INTERNATIONAL INC.
/s/ Randi Garnick By: /s/ Gregg Garnick
- ----------------- -------------------------------
Gregg Garnick, President
Witness: FOUNDER:
/s/ Randi Garnick /s/ Gregg Garnick
- ----------------- --------------------------------------
Gregg Garnick
NEPA VENTURE FUND II, L.P.
By: NEPA II Management Partners, L.P.,
its General Partner
By: NEPA II Management Corporation,
its General Partner
By: /s/ Frederick J. Beste III
--------------------------------------------
Frederick J. Beste III, President
31
<PAGE>
EXHIBIT 4.9
_______________________________________________________________________________
CONVERTIBLE DEBENTURE AND WARRANT PURCHASE AGREEMENT
by and between
QUADRANT INTERNATIONAL, INC.
and
ATLANTIC COASTAL VENTURES, L.P.
_______________________________________________________________________
December 17, 1997
<PAGE>
AGREEMENT, dated December 17, 1997, by and between QUADRANT INTERNATIONAL,
INC., a Pennsylvania corporation (the "Company"), and ATLANTIC COASTAL VENTURES,
L.P., a Delaware limited partnership (the "Investor").
WITNESSETH
----------
WHEREAS, the Company is currently negotiating the sale of preferred stock
to one or more investors for an aggregate purchase price of at least $10,000,000
(the "Class B Preferred Stock Financing"), such stock to be designated as Class
B Convertible Preferred Stock of the Company (the "Class B Preferred Stock"),
the preferences, limitations and rights of which are currently being negotiated
but shall provide that the stock be convertible at the option of its holders,
from time to time and at any time, into fully paid, validly issued and
nonassessable shares of the common stock of the Company, par value $.0l per
share (the "Common Stock"), on a share for share basis; and
WHEREAS, the Company desires financing in the amount of $1,500,000 (the
"Bridge Financing") to be used for general corporate purposes, including working
capital, pending the closing of the Class B Preferred Stock Financing; and
WHEREAS, based on and subject to the terms and conditions of this
Agreement, the Investor is willing to provide the Bridge Financing by acquiring
from the Company, at an aggregate purchase price of $I,500,000, a debenture in
the principal amount of $1,500,000 (the "Debenture") convertible as set forth in
the Debenture, into either shares of Class B Preferred Stock or shares of Common
Stock, and warrants (the "Warrants") for the purchase of up to 270,000 shares of
Common Stock.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE OF DEBENTURE AND WARRANTS.
1.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, the Company hereby issues and sells to the Investor, and the Investor
hereby purchases from the Company, for a purchase price of $1,500,000 (the
"Purchase Price"), the Debenture and the Warrants.
1.2 THE DEBENTURE. The Debenture shall be in the aggregate principal
amount of $1,500,000, shall become due and payable on March 31, 1998 unless
earlier terminated or converted as provided therein (the "Debenture Due Date"),
shall bear interest at the rate of 6% per annum from the date of issuance, which
interest shall be payable in arrears in shares of Common Stock on the Debenture
Due Date, and shall have such other terms and conditions as are set forth in the
form of Debenture attached hereto as Exhibit A.
---------
1.3 THE WARRANTS. The Warrants shall grant the Investor the right to
purchase from time to time and at any time for a period of three years from the
date of this Agreement up to an aggregate of 270,000 shares of Common Stock, at
an exercise price per share and subject to such other terms and conditions as
are set forth in the form of Warrant attached hereto as Exhibit B.
---------
<PAGE>
2. THE CLOSING.
2.1 DELIVERIES OF THE COMPANY. Concurrently with the execution of
this Agreement, the Company is delivering to the Investor:
(a) the Debenture;
(b) the Warrants;
(c) a certificate, executed by the President of the Company,
dated the date hereof, certifying that there does not exist as of the
date hereof a state of facts that would constitute an "Event of
Default" under this Agreement or the Debenture (collectively, all such
defaults being hereinafter referred to as "Defaults"), or which would,
with notice or lapse of time, or both, constitute such a Default, and
the Company is not in default under the terms, conditions or
provisions of its Articles of Incorporation, as amended, its By-laws,
or any indenture, mortgage or deed of trust or other material
contract, agreement, lease, instrument, court order, judgment,
arbitration award, or decree to which it is a party or by which it is
bound or which state of facts would, with notice or lapse of time, or
both, constitute such a default (collectively, "Other Defaults");
(d) copies of (i) resolutions adopted by the Board of Directors
of the Company authorizing and approving this Agreement, the issuance
of the Debenture, the Warrants, the shares of Class B Preferred Stock
into which the Debenture may be converted. assuming the closing of the
Class B Preferred Stock Financing (the "Conversion Preferred Shares"),
upon the filing of the Articles Amendment (as defined below), the
shares of Common Stock into which the Debenture may be converted as
set forth in the Debenture (the "Conversion Common Shares"), upon the
filing of the Articles Amendment, the shares of Common Stock to be
issued as interest on the Debenture (the "Interest Common Shares")
and, upon the filing of the Articles Amendment, the shares of Common
Stock to be issued upon exercise of the Warrants (the "Warrant Common
Shares"), and the consummation of all other transactions contemplated
hereby, as and to the extent required by applicable law, (ii) action
by partial written consent of the shareholders of the Company
representing more than 50% of the outstanding voting securities of the
Company (the "Majority Shareholders") approving, among other matters,
an amendment (the "Articles Amendment") to the Company's Amended and
Restated Articles of Incorporation, as amended (as further amended by
the Articles Amendment, the "Articles of Incorporation"), to increase
the authorized capital stock of the Company, and (iii) action by
partial written consent of the Majority Shareholders approving a prior
action of the Board of Directors in connection with the increase in
the size of the Board of Directors (the "Board Increase"), all such
resolutions and written consents being certified by the Secretary of
the Company;
(e) copies of the Company's Articles of Incorporation and By-
laws as then in effect, all certified by the Secretary of the Company;
2
<PAGE>
(f) a Subsistence Certificate for the Company issued by the
Secretary of the Commonwealth of the Commonwealth of Pennsylvania,
dated within 10 days prior to the date hereof;
(g) an opinion letter, from Cozen and O'Connor, counsel to the
Company, addressed to the Investor, dated the date hereof, in form and
substance satisfactory to the Investor;
(h) a certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the Company's
officers and directors;
(i) a Shareholders' Letter Agreement between the Company, the
Investor and certain shareholders of the Company, signed by the
holders of at least 75% of the outstanding Common Stock of the
Company;
(j) an unqualified opinion of KPMG Peat Marwick LLP on the
Company's financial statements for the fiscal year ended December 31,
1996; and
(k) a receipt for the full amount of the Purchase Price, before
deduction of the fees and expenses payable under Section 13.6.
2.2 DELIVERIES OF THE INVESTOR AT THE CLOSING. Concurrently with the
execution of this Agreement, the Investor shall (i) pay the Purchase Price (less
fees and expenses payable under Section 13.6 for which the Investor has
submitted invoices at least one business day prior to the date hereof) to the
Company by wire transfer of immediately available funds in accordance with the
Company's written wire instructions, and (ii) deliver to the Company a receipt
for the fees and expenses deducted from the Purchase Price.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the date of this
Agreement, the Company represents and warrants to the Investor (regardless of
any investigation made or information obtained by the Investor), as a material
inducement to the Investor to enter into this Agreement, as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction listed
in Schedule 3.1 attached hereto, such jurisdictions being all the jurisdictions
------------
in which it owns or leases properties or conducts any business so as to require
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company. The minute books and stock records of
the Company are complete and accurate in all material respects and all
signatures included therein are the genuine signatures of the persons whose
signatures are required. As used in this Agreement, "material adverse effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations, liabilities, or financial condition of the
Company, taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith.
3
<PAGE>
3.2 SUBSIDIARIES, ETC. Except as set forth in Schedule 3.2, the
------------
Company has no subsidiaries and does not own any capital stock, security,
partnership interest or other interest of any kind in any corporation,
partnership, joint venture, association or other entity.
3.3 CAPITALIZATION. As of the date of this Agreement, and after
giving effect to the Articles Amendment, the Company's authorized capital stock
consists of (a) 50,000,000 shares of Common Stock, of which 14,183,835 shares
are issued and outstanding, 6,500,000 shares are reserved and available for
issuance pursuant to the Company's stock option and purchase plans, each
outstanding grant of which is described in Schedule 3.3, at the exercise prices
------------
set forth on Schedule 3.3, and 6,693,351 shares are available for issuance
------------
pursuant to currently outstanding options and warrants granted outside of the
Company's stock option and purchase plans, each of which is described in
Schedule 3.3, and (b) 31,523,684 shares of Preferred Stock, of which 6,523,684
- ------------
shares are designated Class A Convertible Preferred Stock, par value $.01 per
share (the "Class A Preferred Stock"), of which no shares are issued and
outstanding and all of which are reserved for issuance upon the exercise of all
the warrants (collectively, the "Prior Warrants") to purchase Class A Preferred
Stock at the exercise prices set forth in Schedule 3.3. There are no treasury
------------
shares held by the Company. All outstanding shares of capital stock of the
Company have been, or upon issuance will be, validly issued, fully paid and
nonassessable. Except as disclosed in Schedule 3.3, no shares of capital stock
------------
of the Company are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company or were issued in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state, provincial or municipal securities laws. Except as set forth
in this Section 3.3 or in Schedule 3.3, as of the date of this Agreement, (i)
------------
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company is obligated to register the
sale of any of its securities under the Securities Act (except this Agreement)
and (iv) there are no outstanding securities of the Company which contain any
redemption or similar provisions, or any contracts, commitments, understandings
or arrangements by which the Company is or may become bound to redeem or
purchase a security of the Company. Except as disclosed in Schedule 3.3 there
------------
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Debenture, the Warrants or any
Conversion Shares (collectively, the "Securities"). The Company has furnished to
the Investor true and correct copies of the Company's Articles of Incorporation
and By-laws, and the terms of all securities convertible into or exercisable for
any shares of capital stock of the Company and the material rights of the
holders thereof in respect thereto. A current shareholders' list giving the
names, addresses and number of shares of capital stock of the Company owned by
each shareholder of the Company is attached hereto as part of Schedule 3.3.
------------
3.4 AUTHORIZATION. Subject to the filing of the Articles Amendment,
which shall occur on or before December 29, 1997 (the "Filing Date"), and upon
the Board Increase
4
<PAGE>
becoming effective on or before December 29, 1997 (the "Effective Date"), the
Company has all necessary corporate power and authority to enter into and
perform this Agreement, the Debenture, the Warrants and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "Transaction
Documents"), and to issue and deliver the Securities in accordance with the
terms hereof and thereof. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation of the transactions
contemplated hereby and thereof, including, without limitation, the issuance and
sale of the Debenture and the Warrants, and the issuance of the Conversion
Preferred Shares (assuming the closing of the Class B Preferred Stock
Financing), the Conversion Common Shares, the Interest Common Shares and the
Warrant Common Shares (collectively, the "Conversion Shares"), have been duly
authorized by the Company's Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
shareholders except in connection with the authorization and issuance of the
Class B Preferred Stock, the terms of which are still being negotiated in
connection with the Class B Preferred Stock Financing. The Transaction Documents
have been duly executed and delivered by the Company. Each of the Transaction
Documents constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as such enforceability
may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to
or affecting generally the enforcement of creditors' rights and remedies.
3.5 ISSUANCE OF SECURITIES. The Debenture and the Warrants are duly
authorized for issuance and sale to the Investor by the Company pursuant hereto
and, upon issuance in accordance with the terms hereof, shall be valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies. Upon the filing of
the Articles Amendment on or before the Filing Date, the Conversion Common
Shares will have been duly authorized and reserved for issuance upon conversion
of the Debenture and upon such issuance the Conversion Common Shares will be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof. Upon the filing of the Articles
Amendment on or before the Filing Date, the Interest Common Shares will have
been duly authorized and reserved for issuance in accordance with the terms and
conditions of this Agreement and the Debenture and, upon such issuance will be
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof. Upon the filing of the Articles Amendment on or
before the Filing Date, the Warrant Common Shares will have been duly authorized
and reserved for issuance upon exercise of the Warrants in accordance with the
terms and conditions of this Agreement and the Warrants, and upon such issuance
will be fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof. Subject to the filing, if required, of a Form
D, the issuance by the Company of the Securities is exempt from registration
under the Securities Act.
3.6 CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS. Except as
described on Schedule 3.6, the Company is not a party to or bound by any
------------
written, oral or implied contract, agreement, lease, power of attorney,
guaranty, surety arrangement, or other commitment in excess of $50,000
including, but not limited to, any contract or agreement for the
5
<PAGE>
purchase or sale of merchandise or for the rendering of services, but excluding
any purchase orders to the Company in the normal course of its business.
3.7 BREACH. The Company is not in violation or breach of any of the
terms, conditions or provisions of the Articles of Incorporation or the By-laws,
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract, agreement, lease, instrument, court order,
judgment, arbitration award or decree to which it is a party or by which it is
bound.
3.8 EMPLOYEES, OFFICERS AND DIRECTORS. A current list of the names
and addresses of all officers and directors of the Company is attached hereto as
Schedule 3.8. Except as described on Schedule 3.8, the Company has not entered
- ------------ ------------
into any employment or other agreements with any of its employees, officers or
directors, or any of its former employees, officers or directors.
3.9 COMPLIANCE WITH LAWS. Except as described in Schedule 3.9, the
------------
Company is in compliance with all existing requirements of laws, including but
not limited to federal, state, local and foreign laws, rules and regulations,
and all existing requirements of all governmental bodies or agencies having
jurisdiction over it, the failure to comply with which might have a material
adverse effect on the Company, its assets, business or prospects.
3.10 CONFLICT WITH DOCUMENTS. Except as disclosed in Schedule 3.10 or
--------------
as explicitly provided in this Agreement, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation of
the transactions contemplated hereby and thereby (including, without limitation,
the reservation for issuance and the issuance of the Conversion Shares other
than the Conversion Preferred Shares), either immediately or with the passage of
time or the giving of notice or both, will not:
(a) conflict with or cause a material breach or an Event of
Default under any of the terms, conditions or provisions of, result in
a termination or modification of, or cause any acceleration of any
obligation of the Company under any material contract, lease or other
instrument to which the Company is bound or by which any of the
Company's properties or assets may be affected;
(b) subject to the filing of the Articles Amendment on or before
the Filing Date and the effectiveness of the Board Increase on or
before the Effective Date, result in a violation of the Articles of
Incorporation or the By-laws or any statute, law, rule or regulation
or any order, judgment or decree to which the Company or any of its
properties or assets are subject; or
(c) result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material
properties or assets.
3.11 FINANCIAL STATEMENTS. The Company has furnished to the Investor
copies of its audited annual financial statements for the fiscal year ended
December 31, 1996, and its unaudited financial statements for each month in 1997
through October and for the year of 1997 through October 31, 1997, all of which
are attached hereto as Schedule 3.11. The audited and
-------------
6
<PAGE>
unaudited financial statements referred to above are correct and in accordance
with the Company's books and records, and each presents fairly, in all material
respects, the Company's financial position at the end of the period specified
and the results of its operations and financial condition for such period,
subject to normal recurring adjustments.
3.12 TAXES. The Company has filed all applicable federal, state, local
and foreign tax returns required to be filed to date, in accordance with the
provisions of law pertaining thereto, and has paid all taxes, interest,
penalties and assessments required to have been paid to date. The Company has
not been advised that any of its returns, whether federal, state, local or
foreign, have been or are being audited as of the date hereof.
3.13 LITIGATION. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its properties or rights,
the Common Stock or any of the Company's officers or directors in their
capacities as such.
3.14 INTANGIBLE PROPERTY. Except as set forth on Schedule 3.14, the
-------------
Company has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company, all permits,
licenses and other authority, necessary to the conduct of its business as
presently constituted and conducted, and as proposed to be constituted and
conducted.
3.15 TRADEMARKS, PATENTS, ETC. The corporate names of the Company, and
the trade names, trademarks, and service marks listed on Schedule 3.15 are the
-------------
only names and marks which are used by the Company in the operation of its
business. Except as set forth on Schedule 3.15, no claim has been asserted
-------------
against the Company involving any conflict or claim of conflict of its trade
names, trademarks or service marks or with the trade names, trademarks, service
marks or corporate names of others, and, to the best of the knowledge of the
Company and except as set forth on Schedule 3.15, there is no basis for any such
-------------
claim of conflict. Except as set forth on Schedule 3.15 and to the best of the
-------------
knowledge of the Company, the Company is the sole and exclusive owner of its
trade names, trademarks and service marks and has the sole and exclusive right
to use such trade names, trademarks and service marks. The Company is the
registered owner of the United States and foreign patents listed on Schedule
--------
3.15 and has applications pending with the U.S. Patent Office and/or foreign
- ----
patent offices for the patents listed on Schedule 3.15 as being patents pending.
-------------
The Company has no knowledge of any adverse claim of any kind with respect to
any of such patents or patent applications, nor does it have any knowledge, or
reason to know, that a patent will not issue on any such patent application.
Except as set forth on Schedule 3.15 and to the best of the knowledge of the
-------------
Company, no process used by the Company or any product manufactured or sold by
the Company infringes upon any patent, patent application, trademark, trade name
or service mark of any other party. There has been no claim of infringement of
and, to the best of the knowledge of the Company and except as set forth on
Schedule 3.15, the Company is not infringing on any third party's patent,
- -------------
license, trademark, trade name, service mark, copyright or other proprietary
right.
7
<PAGE>
3.16 ENVIRONMENTAL LAWS. (i) The Company (x) is in compliance with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety or emissions, discharges,
releases, threatened releases, removal, remediation or abatement of pollutants,
contaminants, chemicals or industrial, hazardous or toxic substances or wastes
into or in the environment (including without limitation air, surface water,
ground water or land), or otherwise used in connection with the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous or toxic substances or wastes,
as defined under such applicable laws ("Environmental Laws"), (y) has received
all permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (z) is in compliance with all
terms and conditions of any such permit, license or approval, except to the
extent that the matters within clauses (x), (y) or (z) above would not have a
material adverse effect.
(ii) There is no substance designated a "hazardous substance" by any
Environmental Law, including asbestos, petroleum, urea formaldehyde insulation
and petroleum by-products ("Hazardous Substance") present at any of the real
property currently owned or leased by the Company, except to the extent that
such presence could not reasonably be expected to have a material adverse
effect; and with respect to such real property, to the knowledge of the Company,
there has not occurred (x) any release or any threatened release of a Hazardous
Substance or (y) any discharge or threatened discharge of any Hazardous
Substance into the ground, surface or navigable waters, which discharge or
threatened discharge violates any federal, state, local or foreign laws, rules
or regulations concerning water pollution.
(iii) The Company has not disposed of, transported, or arranged for
the transportation or disposal of any Hazardous Substance where such disposal,
transportation or arrangement would give rise to liability pursuant to any
Environmental Law other than any such liabilities that could not reasonably be
expected to have a material adverse effect.
(iv) To the knowledge of the Company, there are no underground
storage tanks, asbestos-containing materials, polychlorinated biphenyls or urea
formaldehyde insulation at any of the real property currently owned or leased by
the Company in violation of any Environmental Law.
3.17 INSURANCE. The Company maintains insurance on all of its
insurable properties as listed on Schedule 3.17 attached hereto. All such
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insurance policies are in full force and effect and the Company is not in
default of any provision thereof. The Company has not received notice from the
issuer of any such insurance policies of its intention to cancel or refusal to
renew any policy issued by it.
3.18 GOVERNMENTAL CONSENT. No permit, consent, approval or
authorization of, or filing with, any governmental regulatory authority or
agency is required of the Company in connection with the execution, delivery and
performance of the Transaction Documents, or the consummation of the
transactions contemplated hereby and thereby, except as may be required by any
federal or state securities laws, with which the Company will comply.
3.19 LIABILITIES. The Company has no liabilities, whether related to
tax or non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or
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contingent, or otherwise, except (i) as provided in the balance sheet of the
Company as of October 31, 1997 set forth at Schedule 3.11, (ii) as set forth on
-------------
Schedule 3.19 or (iii) for liabilities of a non-material nature incurred in the
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normal course of the Company's business since that date.
3.20 ASSETS. The Company has good and marketable title to all of its
assets free and clear of all liens, charges, claims, encumbrances and defects of
any kind or character, except as set forth on Schedule 3.20 (collectively,
-------------
"Permitted Liens"). To the best of the knowledge of the Company, all equipment,
furniture and fixtures, and other tangible personal property of the Company are
in good operating condition and repair and do not currently require any repairs
other than normal routine maintenance to maintain such property in good
operating condition and repair.
3.21 CONFLICTING INTERESTS. Except as set forth on Schedule 3.21, no
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director, officer, or any relative or affiliate of any director or officer, or,
to the best of the knowledge of the Company, any employee or shareholder of the
Company or any relative or affiliate of any of the employees or shareholders (a)
has any pecuniary interest in any supplier or customer of the Company or in any
other business enterprise with which the Company conducts business or with which
the Company is in competition; or (b) is indebted to the Company for money
borrowed.
3.22 NO PAYMENTS TO SHAREHOLDERS OR OTHERS. Except as set forth on
Schedule 3.22, there has not been any purchase or redemption of any shares of
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stock of the Company by the Company or any transfer, distribution or payment by
it, directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payments made in the ordinary
course of business for goods and services in arm's length transactions, and (ii)
wages paid to non-executive employees. The salaries and benefits payable to the
officers of the Company have not been increased since May 31, 1997.
3.23 ABSENCE OF MATERIAL CHANGES. Except as set forth in Schedule 3.23
------------
attached hereto, since December 31, 1996:
(a) there has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or
affairs of the Company or any material physical damage or loss to any
of its properties or assets or to the premises occupied by it (whether
or not such damage or loss is covered by insurance);
(b) the Company has not taken any action outside of the ordinary
and usual course of its business, except as related to the
transactions contemplated hereby;
(c) the Company has not borrowed any money or become
contingently liable for any obligation or liability of others;
(d) the Company has paid all of its debts and obligations as
they became due;
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(e) except for the Debenture to be issued hereunder, the Company
has not incurred any debt, liability or obligation of any nature to
any party, except for obligations arising from the purchase of goods
or the rendition of services in the ordinary course of business;
(f) the Company has not knowingly waived any right of
substantial value;
(g) the Company has maintained its books, accounts and records
in the usual, customary and ordinary manner; and
(h) the Company has used its best efforts to preserve its
business organization intact, to keep available the services of its
employees, and to preserve its relationships with its customers,
suppliers and others with whom it deals.
3.24 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. No provisions in
the Transaction Documents relating to the Company or any other document,
schedule, exhibit or other information furnished by the Company to the Investor
in connection with the execution, delivery and performance of the Transaction
Documents, or the consummation of the transactions contemplated hereby and
thereby, when taken together as a whole with all other such statements, contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact required to be stated in order to make the statement, in
light of the circumstances in which it is made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF INVESTOR AND RESTRICTIONS ON
TRANSFER.
4.1 REPRESENTATIONS AND WARRANTIES BY THE INVESTOR. The Investor
represents and warrants to the Company as follows:
(a) The Investor (i) is acquiring the Debenture and the Warrants
and (ii) upon conversion of the Debenture or the Class B Preferred
Stock, or upon exercise of the Warrants, will acquire the applicable
Conversion Shares then issuable, for investment for its own accounts
and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands that the
Securities have not been registered under the Securities Act, or under
any state securities or "Blue Sky" laws, and, as a result, are subject
to substantial restrictions on transfer. The Investor acknowledges
that the Securities must be held indefinitely unless subsequently
registered under the Securities Act and any applicable state
securities or "Blue Sky" laws, or exemptions from registration under
the Securities Act and such laws are available; provided, however,
that by making the representations herein, the Investor does not agree
to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an
exemption from registration under the Securities Act and any
applicable state securities or "Blue Sky" laws.
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(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors rights and
to general equity principles.
(c) The Investor is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D under the Securities Act.
(d) The Investor is an "institutional buyer" and, accordingly,
the offer and sale of the Securities to the Investor is an exempt
transaction pursuant to Section 7309(b)(8) of the Delaware Securities
Act.
4.2 LEGENDS. The Investor understands that the certificates or other
instruments representing the Debenture and the Warrants and, until such time as
the sale of the Conversion Shares have been registered under the Securities Act,
the stock certificates representing the Conversion Shares, except as set forth
below, shall bear a restrictive legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND SUCH LAWS.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the Securities Act, (ii) in connection
with a sale transaction, such holder provides the Company with an opinion of
counsel, in a form reasonably acceptable to the Company's counsel, to the effect
that a public sale, assignment or transfer of such Securities may be made
without registration under the Securities Act, or (iii) such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company's counsel, that such Securities can be sold pursuant to Rule 144(k)
promulgated under the Securities Act (or a successor rule thereto) ("Rule 144").
The Investor acknowledges, covenants and agrees to sell the Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement effective under the Securities Act, or
(ii) advice of counsel that such sale is exempt from registration required by
Section 5 of the Securities Act.
5. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties shall survive the consummation of the
transactions provided for in the Transaction Documents for a period beginning on
the date hereof up to and including the earlier of the conversion of all Class B
Preferred Stock held by the Investor into Common Stock or December 31, 1999;
provided, however, that such period shall not end prior to December 31, 1998. No
such representation or warranty shall be deemed to have been waived, affected or
impaired by any investigation made by any person or persons.
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<PAGE>
6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants to
comply with the following affirmative covenants, unless waived by the Investor,
as long as the Debenture remains outstanding; provided, however, that in the
event the Debenture is converted into shares of Class B Preferred Stock, the
Company shall provide to the Investor all such information and rights as the
Company provides to any other holder of Class B Preferred Stock, whether
pursuant to the Company's Articles of Incorporation, as amended, contract or
otherwise; and provided, further, that the Company shall comply with Section
6.2, unless waived by the Investor, until the earlier of (i) such time as the
Investor owns no Debenture, no Warrants, no Class B Preferred Stock and fewer
than 100,000 shares of Common Stock or (ii) the closing of an underwritten
initial public offering of any of the Company's securities under the Securities
Act (or any successor statute), yielding gross proceeds to the Company of at
least $7,500,000.
6.1 FINANCIAL STATEMENTS. The Company shall furnish to the Investor
the following financial statements, reports and other documents, such financial
statements to be prepared in accordance with generally accepted accounting
principles consistently applied, certified by the Company's chief executive or
financial officer:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of the Company, a balance sheet of the
Company as of the end of such fiscal year and related statements of
operations, shareholders' equity and cash flows for such fiscal year,
all in reasonable detail and setting forth in comparative form the
figures as of the end of and for the previous fiscal year, which
financial statements shall have been audited, and shall be accompanied
by an unqualified opinion addressed to the Company from "Big Six"
independent auditors or other independent auditors that are reasonably
satisfactory to the Investor, together with a copy of such auditors'
letter to Company's management;
(b) as soon as available, and in any event within 20 days after
the end of each month for such month and for the year to date, an
unaudited balance sheet and unaudited statements of operations,
shareholders' equity and cash flows, together with a comparison of
such financial statements with the budget of the Company for such
period; and
(c) as soon as available, and in any event at least 60 days prior
to the end of each fiscal year of the Company, an annual budget and
business plan for the subsequent fiscal year, which budget and
business plan shall include a monthly breakdown of financial
statements, which breakdown shall include the underlying assumptions
and a brief qualitative description of the Company's plan by the
Company's Chief Executive Officer in support of such budget and
business plan, which also shall have been approved and accepted by the
Board of Directors of the Company. If during the course of operations
for any such month it becomes apparent that deviations from such
financial statements, budget and business plan have occurred, the
Company shall submit to its Board of Directors a statement of such
deviation within five business days from the date of the Company's
knowledge of such deviation (the "Statement"). The Statement shall
detail the manner in which a new financial projection deviates from
the annual business plan and the reason therefor. The Board of
Directors shall have the right to ask
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<PAGE>
questions or request any other reasonable additional information with
respect to the Statement. Any and all subsequent deviations from such
financial statements shall be resubmitted to the Board of Directors of
the Company for approval and acceptance or for required further
revision until such approval and acceptance is obtained.
In the event that the Company at any time hereafter is required, by law or by
generally accepted accounting principles, to consolidate its financial
statements with those of a subsidiary corporation, the Company shall thereafter
furnish the financial statements required by this Section 6.1 on a consolidated
basis, and the monthly and annual financial statements specified above shall be
furnished with consolidating financial statements.
6.2 BOARD OF DIRECTORS, MEETINGS. The Company shall maintain By-laws
provisions satisfactory to the Investor in its sole discretion with respect to
the following provisions and use its best efforts to achieve the following
objectives:
(a) Subject to the terms of this Agreement, the Investor shall
have the right to designate one person to serve as a member of the
Board of Directors (the "Designated Director"). The Investor hereby
designates Walter L. Threadgill as its first Designated Director and
the Company hereby agrees to Mr. Threadgill to be elected to the
Company's Board of Directors as promptly as possible. The Investor
shall also have the right to replace the Designated Director from time
to time and at any time during the Applicable Period. In that regard,
the Company agrees to take all necessary action to cause any person
named by the Investor during the Applicable Period as a replacement
Designated Director to be elected to the Company's Board of Directors
in replacement of the previous Designated Director as promptly as
possible thereafter. In the event the Company establishes an
Executive Committee of the Board of Directors (or any other similar
committee), one member of any such committee shall be the Designated
Director. The Company shall reimburse the Designated Director for all
reasonable travel and other expenses incurred in connection with such
Director's participation on the Board of Directors or any committee of
the Board of Directors.
(b) The Company shall not hold any meetings of the Board of
Directors (or any other similar meetings) until such time as the
Designated Director has been elected to the Company's Board of
Directors.
(c) The Company shall permit the Designated Director to invite
one or more additional individuals to any and all meetings of the
Board of Directors or of the shareholders of the Company; provided,
however, that the individual invited must be a director, officer,
consultant or employee of the Investor. Such individuals may
participate in discussions and express their views on matters before
the Board of Directors, but shall not be entitled to vote. Such
attendance may be either in person or by telephone.
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6.3 ADDITIONAL INFORMATION.
(a) The Company shall, as promptly as possible (but, in any
event, within ten days) after obtaining knowledge of the occurrence of
any "Default" (as such term is defined in Section 2.1(c) above), or
any other material adverse development or event, furnish the Investor
with a detailed written notice of such default or event and the
proposed response of Company management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the
Investor with notice of all material actions, suits and proceedings
before any court or governmental agency, commission, board, bureau,
department or instrumentality, domestic or foreign, affecting the
Company.
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or
directors of the Company, and all written consents taken by the
shareholders and/or directors of the Company.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the
same, furnish the Investor with all reports and financial statements
that the Company shall send or make available to the shareholders or
the directors of the Company or the Securities and Exchange
Commission.
(e) The Company shall, as promptly as possible (but, in any
event, within ten days) after the occurrence thereof, furnish the
Designated Director with prompt written notice of all material
developments and transactions outside of the ordinary course of
business or which might otherwise have a significant effect on the
Company's business prospects or financial condition or on the
Investor's investment in the Company.
(f) The Company shall promptly furnish the Investor or the
Designated Director with copies of all material contracts, indentures,
instruments and agreements the Company provides to any investor in the
Class B Preferred Stock Financing or in any other additional bridge
financing, when such documents are provided to such investor.
(g) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the
condition of operations, financial or otherwise, of the Company as the
Investor may, from time to time, reasonably request.
(h) The Investor agrees not to disclose to third parties any
information concerning the Company which is furnished to the Investor
by the Company and designated as confidential, except as required by
law, legal process or its fiduciary duty to report financial and
business information to its partners, shareholders, directors or
affiliates and to such other persons as the Investor, in the exercise
of
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its prudent business judgment, may select and shall use reasonable
commercial efforts to have such persons maintain such confidentiality
of the confidential information. The term "confidential information"
does not include information which (i) was or becomes generally
available to the public other than as a result of a disclosure by the
Investor, or (ii) was or becomes available to the Investor on a non-
confidential basis from a source other than the Company, provided that
such source is not bound by a confidentiality agreement with the
Company.
6.4 INSPECTION. The Company shall permit, at any reasonable time and
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.5 LIFE INSURANCE. The Company shall use its best efforts to obtain
and maintain at its expense, a key man life insurance policy or policies, with
an insurance company or association satisfactory to the Investor, on the life of
Frank Wilde and Michael Harris, each in the amount of $1,500,000 payable, until
conversion or payment of the Debenture, to the Investor, and the amount of the
insurance so obtained shall not be decreased or cancelable other than due to the
non-payment of premiums or prior conversion or repayment of the Debenture.
Assuming issuance of such a life insurance policy or policies as to which the
Investor is the beneficiary, upon the death of Mr. Wilde or Mr. Harris, the
Investor shall accelerate the Debenture and the proceeds of such policy shall be
used to repay all then outstanding principal and interest under the Debenture,
to the extent of such policy or policies. To the extent the proceeds of such
life insurance policy exceed all amounts due under the Debenture, the Investor
shall remit to the Company such excess remaining after all amounts due on the
Debenture have been fully satisfied.
6.6 COMPLIANCE WITH ARTICLES OF INCORPORATION AND BY-LAWS. The
Company shall perform and observe all the obligations and provisions set forth
in the Articles of Incorporation and the Bylaws.
6.7 MAINTAIN RIGHTS AND FACILITIES. The Company shall maintain and
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
6.8 BOOKS AND RECORDS. The Company shall make and keep books,
records and accounts, which, in reasonable detail accurately and fairly reflect
its transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (a) transactions are
executed in accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of the financial
statements required herein and to maintain accountability for assets; and (c)
access to assets is permitted only in accordance with management's general or
specific instructions and
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recorded assets are compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any difference.
6.9 OTHER INSURANCE. The Company shall maintain insurance against
such risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.10 CONTRACTS AND AGREEMENTS. The Company shall comply in all
material respects with the provisions of all material contracts, indentures,
instruments and agreements to which it is a party or by which the Company or its
properties are bound, and with all other material obligations which the Company
incurs or to which it becomes subject.
6.11 TAXES. The Company shall pay and discharge when due all federal,
state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
however, that the Company may in good faith contest any tax, assessment,
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.12 COMPLIANCE WITH LAWS. The Company shall comply with all laws,
rules and regulations of all governmental authorities and agencies applicable to
the Company, its business or its properties, the failure to comply with which
might have a material adverse effect on the Company.
7. NEGATIVE COVENANTS. The Company hereby covenants that as long as the
Debenture remains outstanding the Company shall comply with the following
negative covenants unless such covenant is waived by the Investor or the
proposed action is approved by the Designated Director:
7.1 CONDUCT OF BUSINESS. The Company shall not:
(a) (i) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation
or other entity or entities; (ii) reorganize, dissolve or liquidate
the Company, or adopt any plan of reorganization, dissolution or
liquidation of the Company; (iii) sell, assign or otherwise dispose of
all or any substantial portion of its assets; or (iv) acquire all or
any substantial portion of the voting stock or assets of another
corporation or other entity or entities; provided, however, the
Company may complete its proposed acquisition of VIONA Development
Hard- & Software Engineering, GmbH, with the cash portion of the
purchase price not to exceed $2,500,000 (excluding any applicable
taxes that the Company has agreed to assume);
(b) except as otherwise required, permitted or acknowledged by
this Agreement or any Schedule hereto, create, authorize or issue any
additional shares of capital stock or any rights to acquire any shares
of capital stock or any other security, or repurchase any shares of
its capital stock except from employees upon termination of
employment;
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(c) incur, create, assume or guarantee any indebtedness which
ranks senior or pari passu in the right of payment to the Debenture,
other than additional pari passu bridge financing of up to $1,000,000
on the same terms and considerations contemplated hereby, which the
Company may obtain following the execution of this Agreement;
(d) except as contemplated by this Agreement, amend the Articles
of Incorporation or the By-laws; or
(e) effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the
conduct of the business of the Company, as such business is conducted
and proposed to be conducted.
7.2 LIENS AND ENCUMBRANCES. Except for Permitted Liens (as defined
in Section 3.20), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent.
7.3 DIVIDENDS. The Company shall not declare or pay any dividend
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than as required, permitted
or acknowledged by this Agreement or the Articles of Incorporation.
7.4 AGREEMENTS. The Company shall not enter into any contract,
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Debenture, or
which otherwise restricts, in any material respect, the Company's ability to
perform under the Transaction Documents.
7.5 INSIDER TRANSACTIONS. Except as disclosed in Schedules 3.21 and
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3.22, the Company shall not enter into any transaction with any of its officers,
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directors or shareholders, unless such transaction is an arm's-length
transaction on fair and reasonable terms, and shall not increase in any way the
compensation payable, directly or indirectly, to any of the Company's officers.
7.6 CAPITAL EXPENDITURES. The Company shall not incur, in any
twelve-month period, capital expenditures (including expenditures for
capitalized leases) in excess of $150,000 or any single capital expenditure in
excess of $60,000, unless such expenditures were explicitly included in an
approved budget of the Company. Notwithstanding the foregoing, the Company
shall obtain the prior written approval of the Investor or the Designated
Director with respect to any expenditure submitted to NEPA Venture Fund II, L.P.
("NEPA II") for its approval.
7.7 PAYMENTS, NO DEFAULT. The Company shall make all required
payments of rent, taxes, debts and other material obligations of the Company
promptly when due. The
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Company shall not be in default with respect to any material contracts,
agreements or instruments to which the Company is a party or by which the
Company is bound.
7.8 MATERIAL CONTRACTS. The Company shall not, during any fiscal
year of the Company, enter into material contracts, other than in the ordinary
course of business, pursuant to which the Company would incur liabilities in
excess of $50,000 individually or $100,000 in the aggregate, unless the Board of
Directors of the Company has previously approved the execution of such contracts
or such contracts were explicitly included in an approved budget of the Company.
Notwithstanding the foregoing, the Company shall obtain the prior written
approval of the Investor or the Designated Director with respect to any material
contracts submitted to NEPA II for its approval.
8. REGISTRATION AND RELATED RIGHTS.
8.1 PIGGYBACK REGISTRATION.
(a) As used in this Section 8.1, "Registration Stock" shall mean
any Securities or any other shares of Common Stock, Class B Preferred
Stock or other securities received by holders of the Securities upon
any stock split, stock dividend, recapitalization, merger,
consolidation or similar event; provided, however, that Registration
Stock shall not include any Securities or such other securities
disposed of pursuant to one or more registration statements under the
Securities Act, or which have been sold pursuant to Rule 144 (as
previously defined) or which have otherwise been sold without
registration under the Securities Act. For purposes of this Section
8, any record holder of securities convertible into Registration Stock
(or exercisable for or payable in Registration Stock) shall be deemed
to be the holder of the Registration Stock issuable upon such
conversion and/or exercise and/or payment.
(b) If the Company should seek to register under the Securities
Act or qualify any of the securities holdings of the Company or any of
its shareholders (except in connection with any stock option plan,
stock purchase plan, savings or similar plan or an acquisition, merger
or exchange of stock, to be registered on Forms S-4, S-8 or any
successor forms under the Securities Act) and if the form of
registration statement proposed to be used otherwise may be used for
the registration of the Registration Stock, then, on each such
occasion, the Company shall furnish the Investor with at least 30 days
prior written notice thereof. At the written request of the Investor,
given within 20 days after the receipt of such notice, the Company
will use its best efforts to cause all of the Registration Stock for
which registration shall have been requested by the Investor to be
included in such registration statement. In the event that the
proposed registration by the Company is, in whole or in part, an
underwritten public offering of securities of the Company, and the
managing underwriter determines and advises in writing that the
inclusion of all Registration Stock proposed to be included in the
underwritten public offering and other issued and outstanding shares
of Common Stock proposed to be included therein by persons other than
(i) holders of Registration Stock or (ii) holders of Subordinate
Shares (as defined in Section
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8.4) with rights equal to those of the holders of Registration Stock
("Other Registration Stock") (such other shares which are not
Registration Stock or Other Registration Stock being the "Other
Shares") would interfere with the successful marketing (including
pricing) of the securities, then the number of shares of Registration
Stock, Other Registration Stock and Other Shares to be included in
such underwritten public offering shall be reduced first, pro rata
among the holders of Other Shares; second, if necessary, pro rata
among the holders of Registration Stock and Other Registration Stock
combined, based on the number of shares requested by holders thereof
to be registered in such underwritten public offering; and lastly, if
necessary, among the Company's shares requested by the Company to be
registered; provided, however, that the holders of Registration Stock
do not then elect to exercise their rights under Section 8.2; and,
further provided, that in no event, without the consent of the holders
of at least 67% of the Registration Stock, shall the percentage of the
Registration Stock that is included in such registration statement be
less than the percentage of the securities of any other shareholder
included therein. In the event that the Company offers any of its
securities in an offering exempt from registration under the
Securities Act pursuant to Regulation A, the Company will provide to
the holders of Registration Stock rights comparable to those provided
herein.
8.2 DEMAND REGISTRATION.
(a) After the closing of an underwritten offering of the Common
Stock, if at any time the Company is requested in writing by the
holders of not less than 67% of the Registration Stock to effect the
registration under the Securities Act of at least 33 1/3% of the
Registration Stock, the Company shall promptly give written notice of
such proposed registration to all record holders of Registration
Stock. Such holders shall have the right, by giving written notice to
the Company within 30 days from receipt of the Company's notice, to
elect to have included in such registration such of their Registration
Stock as such holders may request in such notice of election.
Thereupon, the Company shall, as expeditiously as possible, use its
best efforts to effect the registration, on a form of general use
under the Securities Act of all shares of Registration Stock which the
Company has been requested to register; provided, however, that if the
holders of not less than 67% of the Registration Stock shall so
request (and at least 50% of the Registration Stock is being
registered), the Company shall file such registration statement
pursuant to Rule 415 or any successor rule or regulation under the
Securities Act, so as to permit the continuous or delayed offering of
the Registration Stock in accordance with the intended method of
disposition specified in the notice of the exercise of rights under
this Section 8.2(a), to the extent such offering qualifies under such
rule or regulation, but in no event shall the Company be required to
maintain the effectiveness of such registration statement beyond a two
year period. The Company shall be obligated to cause to become
effective one registration statement pursuant to which Registration
Stock is sold under this Section 8.2(a).
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<PAGE>
(b) In addition and not in limitation of the rights set forth in
Sections 8.1 (b) and 8.2(a), at such time as the Company shall have
qualified for the use of a short form Form S-3 in an offering solely
for the accounts of persons other than the Company (or any similar
form or forms promulgated by the Securities and Exchange Commission),
the holders of not less than 67% of the Registration Stock shall have
the right to request an unlimited number of registrations on Form S-3
or other similar forms. Such holders shall have the right, by giving
written notice to the Company within 20 days from receipt of the
Company's notice, to elect to have included in such registration such
of their Registration Stock as such holders may request in such notice
of election. Thereupon, the Company shall, as expeditiously as
possible, use its best efforts to effect the registration, on Form S-3
of all shares of Registration Stock which the Company has been
requested to register. The Company shall not be required to effect
any such registration more than once every twelve months.
Registrations effected on Form S-3 shall not be considered to be
demand registrations pursuant to Section 8.2(a) hereof.
(c) The Company may include in a registration requested under
this Section 8.2 any additional authorized shares of the Common Stock
of the Company, whether or not issued, for sale by the Company or for
sale by others; provided, however, that such shares shall not be
included to the extent that the holders of a majority of the shares of
Registration Stock included therein determine in good faith that the
inclusion of such shares will interfere with the successful marketing
of the shares of Registration Stock to be included therein; and,
provided, further, that, upon the election of the holders of a
majority of the shares of Registration Stock included therein, or if
the number of shares to be so included equals or exceeds the number of
shares of Registration Stock included therein by the holders of
Registration Stock, such registration shall be deemed to be a
registration pursuant to Section 8.1(b) hereof.
(d) The underwriter and the terms of the underwriting for any
registration pursuant to this Section 8.2 shall be mutually acceptable
to the Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to the
contrary:
(i) The Company reserves the right to delay any such
registration pursuant to Section 8 for a period of not more
than sixty days, or to withhold efforts to cause such
registration statement to become effective for a period of
not more than sixty days, if the Board of Directors of the
Company determines in good faith that such registration might
(A) interfere with or affect the negotiation or completion of
any material transaction that is being contemplated by the
Company, or (B) involve initial or continuing disclosure
obligations materially adverse to the best interests of the
Company's shareholders. If, after a registration statement
becomes effective, the Company advises the holders of the
Registration
20
<PAGE>
Stock covered by such registration statement that the Company
considers it appropriate for the registration statement to be
amended, the holders of such shares shall suspend any further
sales of their registered shares until the Company advises
them that the registration statement has been amended. The
time periods referred to in this Section 8 shall be extended
for an additional number of business days during which the
rights to sell shares was suspended.
(ii) The Company shall not be obligated to file a
registration statement pursuant to Section 8.2 within three
months after the effective date of any registration under
which piggyback rights were granted pursuant to Section 8.1.
8.3 FURTHER OBLIGATIONS OF THE COMPANY. Whenever the Company is
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to:
(a) prepare for filing and file with the Securities and Exchange
Commission promptly thereafter a registration statement and such
amendments and supplements to said registration statement and the
prospectus used in connection therewith as may be necessary to keep
said registration statement effective and to comply with the
provisions of the Securities Act with respect to the sale of
securities covered by said registration statement for the period
necessary (but, other than as otherwise provided in Section 8.2(a), in
no event more than nine months) to complete the proposed public
offering;
(b) furnish to each selling holder so requesting such copies of
preliminary and final prospectus and such other documents as said
holder may reasonably request to facilitate the public offering of
such holder's Registration Stock;
(c) use its best efforts to register or qualify the Registration
Stock covered by said registration statement under the securities or
"Blue Sky" laws of such jurisdictions as the holders of Registration
Stock may reasonably request, to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and do any and all other acts and things that may
be reasonably necessary or advisable to enable such seller to
consummate the disposition in such jurisdictions of its Registration
Stock covered by such registration statement, except that the Company
shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would
not, but for the requirements of this subdivision (c), be obligated to
be so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any such
jurisdiction;
(d) furnish to the selling holders, and any underwriters or
broker-dealers through whom the Registration Stock may be sold, an
opinion or opinions
21
<PAGE>
of counsel for the Company and a "cold comfort" letter or letters of
the independent auditors for the Company, in form and substance
customary for similar offerings;
(e) permit each selling holder or the selling holder's counsel or
other representatives, at the selling holder's expense, to inspect and
copy such corporate documents and records as may reasonably be
requested by them;
(f) if so requested, furnish to each selling holder a copy of all
documents filed and all correspondence to or from the Securities and
Exchange Commission in connection with any such offering;
(g) immediately notify each seller of Registration Stock covered
by such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such seller or
holder, prepare and furnish to such seller and holder a reasonable
number of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers
of such Registration Stock, such prospectus shall not include 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 not misleading in the light of the circumstances then
existing;
(h) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of at least
twelve months, but not more than eighteen months, beginning with the
first month of the first fiscal quarter after the effective date of
such registration statement, which earnings statement shall satisfy
the provisions of Section 13(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"); and
(i) provide and cause to be maintained a transfer agent and
registrar for all registrable securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement.
If requested by the Company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Securities and Exchange Commission in connection therewith.
22
<PAGE>
8.4 REGISTRATION RIGHTS EQUAL OR SUPERIOR. The Company shall not
grant any registration rights or register any securities for the account of any
person other than holders of Registration Stock unless permitted to do so by (i)
the written consent of the holders of not less than 67% of the Registration
Stock, and (ii) the consent of the Designated Director; provided, however, that
the Company shall be entitled to grant registration rights or register any
securities for the account of any person other than holders of Registration
Stock without the consent of the Designated Director as long as such rights
applicable to such securities are made subject and subordinate to, or no more
than equal to the rights of the holders of Registration Stock under Sections 8.1
and 8.2 (such securities being the "Subordinate Shares").
8.5 EXPENSES, ETC. All expenses in connection with the preparation
and filing of any registration statement under this Section 8, any registration
or qualification under the securities or "Blue Sky" laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with "Blue Sky" or state securities
laws, (iii) other fees or expenses expressly applicable to securities being sold
by the selling shareholder, and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 INDEMNIFICATION. The Company shall indemnify the selling holders
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock were registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto (unless cured by an amendment or supplement
to the prospectus delivered to the selling holders prior to the sales of the
Registration Stock that are subject to the claimed right of indemnification), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registration Stock
that are subject to the claimed right of indemnification); and will reimburse
the selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such selling holders in connection with
investigating or defending against such loss, claim, damage, liability or
action; except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such selling holders expressly for use
therein. In connection with any such registration statement, the selling
holders of Registration Stock will furnish the company in writing such
information as may reasonably be requested by the company for use in any such
registration statement or prospectus and will indemnify the Company, its
directors and officers, and, to the extent required in any agreement with any
underwriter or broker-dealer, each such underwriter or broker-dealer and each
person, if any, who controls the Company or any underwriter or broker-dealer
(within the meaning of the Securities Act) against any losses,
23
<PAGE>
claims, damages, liabilities, expenses and actions in respect thereof (under the
Securities Act or common law or otherwise) resulting from any untrue statement
or alleged untrue statement of a material fact required to be stated in such
registration statement or prospectus and necessary to make the statements
therein not misleading; and will reimburse the Company for any legal or other
out-of-pocket expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; but only to the extent that such untrue statement or omission was
contained in information so furnished in writing by the selling holders of
Registration Stock expressly for use therein, and only to the extent of proceeds
received by the selling holders of Registration Stock in the offering. The
Company further agrees and the selling shareholders shall agree that, in
connection with any underwritten public offering, the Company also will enter
into customary contribution arrangements with the selling holders of
Registration Stock and the underwriters or broker-dealers through whom the
Registration Stock may be sold, with respect to situations in which
indemnification is potentially unavailable.
8.7 WITHDRAWAL. If a public offering is not completed within nine
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1 (b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company reserves the right, at its option, to
withdraw from registration any securities offered by the Company which have not
been sold during such period, provided that no securities offered by any holder
of Registration Stock shall be withdrawn without the consent of the holders of
50% of the Registration Stock.
8.8 EXCHANGE ACT. As promptly as possible following receipt of a
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the Exchange Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on the Nasdaq National Market,
as requested, and shall keep effective such registration and maintain such
listing or inclusion, and shall use its best efforts timely to file such
information, documents and reports as the Securities and Exchange Commission may
require or prescribe that the Company file in connection therewith. The Company
will, at the request of any holder of Registration Stock, advise such holder in
writing as to whether all reports required to be filed by the Company under
Section 13 of the Exchange Act during the 12 months preceding such request (or
for such shorter period as the Company was required to file such reports) have
been filed, and any other information which the holder may reasonably require in
order to comply with Rule 144, or any other comparable rule, as then in effect.
9. EVENTS OF DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:
9.1 DEFAULT ON PAYMENTS TO THE INVESTOR. The failure of the Company
to make (a) any principal or interest payment on the Debenture when due, or (b)
any other payment upon any other written obligation of the Company to the
Investor within 15 days after written notice from the Investor to the Company;
regardless of whether any such failure to make the
24
<PAGE>
payments described in (a) and (b) above is due to a legal inability or the
incapacity of the Company to make any such payments.
9.2 INFORMATION, REPRESENTATIONS AND WARRANTIES. Any information
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
9.3 COVENANTS AND AGREEMENTS. The failure of the Company to observe,
perform or abide by any other covenant, warranty, agreement or provision in any
of the Transaction Documents, which failure is not cured to the Investor's
reasonable satisfaction within 30 days after written notice from the Investor to
the Company of its occurrence; provided, however, that no Event of Default shall
be considered to have occurred if the failure is not the failure to pay money
and is of such a nature that it reasonably cannot be cured within the Cure
Period, but if it is curable and the Company in good faith begins efforts to
cure it within the Cure Period and continues diligently to do so, the Company
shall have an additional 30 days from the date on which the Cure Period ends to
effect the cure. If the failure continues after the expiration of such
additional 30 day period, regardless of whether such failure might be curable at
some time beyond such additional 30 day period, such failure shall nevertheless
be considered an Event of Default.
9.4 DEFAULT ON OTHER OBLIGATIONS. The occurrence of a material
default following the expiration of any applicable cure period, if any, in any
material obligation of the Company or any violation of law or refusal of
regulatory permission which has a material adverse effect on the Company's
operations.
9.5 CERTAIN EVENTS AS TO THE COMPANY. The Company shall (A) admit in
writing its inability to pay its debts generally as they become due; (B) file a
petition or answer or consent seeking relief under the Federal Bankruptcy Code,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy or insolvency law or other similar law, not discharged or
vacated or set aside or stayed within 45 days; (C) consent to the institution of
proceedings under any law referenced in (B) above, not discharged or vacated or
set aside or stayed within 45 days, or to the filing of any such petition, not
discharged or vacated or set aside or stayed within 45 days or to the
appointment or taking possession of a receiver, liquidator, assignee, trustee,
custodian (or other similar official) of the Company or any subsidiary or of any
substantial part of their property; (D) fail generally to pay its debts as such
debts become due, or take corporate action in furtherance of any such action;
(E) make an assignment for the benefit of its creditors; or (F) fail to meet any
of its material monetary obligations; provided, however, that no Event of
Default shall be considered to have occurred under subsection 9.5(F) if the
failure to meet such material monetary obligations is due to a good faith
dispute between such parties, which dispute shall continue for no more than 30
days; provided further, that upon the expiration of such 30 day period, the
Company shall have, upon notice to the Investor an additional 30 day period to
resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time beyond such additional 30 day period, such failure under subsection
9.5(F) shall nevertheless be considered an Event of Default.
25
<PAGE>
9.6 CERTAIN EVENTS AS TO FRANK WILDE. Frank Wilde dies, is disabled
for a period in excess of 120 days during which Mr. Wilde is unable to perform
his duties as an officer of the Company for a full eight hour day (the
"disability" of Mr. Wilde), terminates his employment with the Company or has
his employment terminated by the Company.
10. RIGHTS OF INVESTOR UPON DEFAULT.
10.1 RIGHTS ON DEFAULT. If there shall occur and be continuing an
Event of Default as defined in the foregoing Section 9, as long as the Debenture
is outstanding, the Investor may, by written notice to the Company, declare the
Company to be in default hereunder, whereupon, if the Investor so specifies in
such notice, the Debenture and all other indebtedness of the Company to the
Investor now or hereafter incurred, shall become immediately due and payable
without further demand, presentation or notice of any kind.
10.2 ADDITIONAL RIGHTS. The Investor shall have such additional
rights and remedies as are contained herein, in the Debenture, the Warrants, the
Class B Preferred Stock, or in any other documents and agreements delivered or
given in connection herewith, and all rights which it might have at law or
equity, all of which rights and remedies shall be cumulative.
11. LOCK-UP AGREEMENT. In the event that the Company determines to effect
an underwritten initial public offering, the Investor agrees that, for a period
of 180 days following the effective date of any registration filed in connection
therewith, the Investor will not directly or indirectly sell, transfer or
otherwise dispose of, any shares of Class B Preferred Stock, any shares of
Common Stock, or any right to acquire shares of Common Stock owned by the
Investor without the prior written consent of the underwriter(s) of such initial
public offering. The Company agrees to use its best efforts to cause such
underwriter not to unreasonably withhold such consent.
12. FURTHER ASSURANCE. The Company and the Investor agree to execute and
deliver all such other instruments and take all such other actions as any party
may reasonably request from time to time after the date hereof and without
payment of further consideration, in order to effectuate the transactions
provided for herein. The parties shall cooperate fully with each other and with
their respective counsel and accountants in connection with any steps required
to be taken as part of their respective obligations under this Agreement.
13. MISCELLANEOUS.
13.1 WAIVERS AND AMENDMENTS. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
13.2 GOVERNING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
26
<PAGE>
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
13.4 ENTIRE AGREEMENT. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and supersedes all prior agreements, understandings, inducements or conditions,
express or implied, oral or written, except as herein contained. The express
terms hereof control and supersede any course of performance and/or usage of
trade inconsistent with any of the terms hereof.
13.5 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly made and received when personally served, or when
mailed by first class mail or overnight, by courier service such as Federal
Express, postage prepaid, or telecopied with answer back receipt and hard copy
sent in the manner set forth above, addressed as set forth below:
(i) If to the Company, then to:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, PA 19355
Telecopier No.: (610) 695-2592
Attn: President
with a copy, given in the manner prescribed above, to:
Cozen and O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
Telecopier No.: (215) 665-2013
Attn: Michael J. Heller, Esq.
(ii) If to the Investor, then to:
Atlantic Coastal Ventures, L.P.
777 Summer Street, Suite 300
Stamford, CT 06901
Telecopier No.: (202) 293-1181
Attn: Walter L. Threadgill
with a copy, given in the manner prescribed above, to:
Kramer, Levin, Naftalis & Frankel
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<PAGE>
919 Third Avenue
New York, NY 10022
Telecopier No.: (212) 715-8000
Attn: Bruce Rabb, Esq.
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
13.6 PAYMENT OF EXPENSES. All reasonable legal fees and expenses
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof shall be paid by the Company from
time to time promptly upon submission of an invoice therefore. In addition, the
Company shall pay the Investor, concurrently with the execution of this
Agreement, the amount of $5,000, as full and final reimbursement for the
Investor's performance of due diligence on the Company.
13.7 BROKERS. Each party represents that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement (other than Lehman Brothers Inc. ("Lehman Brothers")) and neither
party is under any obligation to pay any finder's or broker's fee in connection
herewith (other than 9% of the Purchase Price payable by the Company to Lehman
Brothers). Each party will indemnify, defend and hold the other party harmless
from any claim based on breach of this representation.
13.8 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing, and that all remedies, either
under this Agreement or by law or otherwise, shall be cumulative and not
alternative.
13.9 TITLES. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
13.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
13.11 EXECUTION; COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof,
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<PAGE>
individually or taken together, shall bear the signatures of all of the parties
reflected hereon as the signatories.
13.12 EXHIBITS; SCHEDULES. All Exhibits and Schedules attached hereto
are hereby incorporated by reference into, and made a part of, this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
QUADRANT INTERNATIONAL, INC.
By: /s/ Gregg Garnick
-------------------------------------
Name: Gregg Garnick
Title: Chief Executive Officer
ATLANTIC COASTAL VENTURES, L.P.
By: Atlantic Coastal, L.P.,
its General Manager
By: /s/ Walter L. Threadgill
-------------------------------------
Name: Walter L. Threadgill
Title: General Partner
By: /s/ Donald F. Greene
-------------------------------------
Name: Donald F. Greene
Title: General Partner
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EXHIBIT 4.10
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE AND WARRANT PURCHASE AGREEMENT
by and between
QUADRANT INTERNATIONAL, INC.
and
DONALD HORTON AND MARTY HORTON, AS COMMUNITY PROPERTY
- --------------------------------------------------------------------------------
February 17, 1998
<PAGE>
AGREEMENT, dated February 17, 1998, by and between QUADRANT INTERNATIONAL
INC., a Pennsylvania corporation (the "Company"), and DONALD HORTON AND MARTY
HORTON, as community property (jointly, the "Investor").
W I T N E S S E T H
-------------------
WHEREAS, the Company is currently negotiating the sale of preferred stock
to one or more investors for an aggregate purchase price of at least $10,000,000
(the "Class B Preferred Stock Financing"), such stock to be designated as Class
B Convertible Preferred Stock of the Company (the "Class B Preferred Stock"),
the preferences, limitations and rights of which are currently being negotiated
but shall provide that the stock be convertible at the option of its holders,
from time to time and at any time, into fully paid, validly issued and
nonassessable shares of the common stock of the Company, par value $.01 per
share (the "Common Stock"), on a share for share basis; and
WHEREAS, the Company desires financing in the aggregate amount of
$2,500,000 (the "Bridge Financing") to be used for general corporate purposes,
including working capital, pending the closing of the Class B Preferred Stock
Financing; and
WHEREAS, based on and subject to the terms and conditions of this
Agreement, the Investor is willing to provide a portion of the Bridge Financing
by acquiring from the Company, at an aggregate purchase price of $250,000, a
debenture in the principal amount of $250,000 (the "Debenture") convertible as
set forth in the Debenture, into either shares of Class B Preferred Stock or
shares of Common Stock, and warrants (the "Warrants") for the purchase of up to
47,833 shares of Common Stock.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE OF DEBENTURE AND WARRANTS.
1.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, the Company hereby issues and sells to the Investor, and the Investor
hereby purchases from the Company, for a purchase price of $250,000 (the
"Purchase Price"), the Debenture and the Warrants.
1.2 THE DEBENTURE. The Debenture shall be in the aggregate principal
amount of $250,000, shall become due and payable on March 31, 1998 unless
earlier terminated or converted as provided therein (the "Debenture Due Date"),
shall bear interest at the rate of 6% per annum from the date of issuance, which
interest shall be payable in arrears in shares of Common Stock on the Debenture
Due Date, and shall have such other terms and conditions as are set forth in the
form of Debenture attached hereto as Exhibit A.
---------
1.3 THE WARRANTS. The Warrants shall grant the Investor the right to
purchase from time to time and at any time for a period of three years from the
date of this Agreement up to an aggregate of 45,000 shares of Common Stock, at
an exercise price per share and subject to such other terms and conditions as
are set forth in the form of Warrant attached hereto as Exhibit B.
---------
<PAGE>
2. THE CLOSING.
2.1 DELIVERIES OF THE COMPANY. Concurrently with the execution of
this Agreement, the Company is delivering to the Investor:
(a) the Debenture;
(b) the Warrants;
(c) a certificate, executed by the President of the Company,
dated the date hereof, certifying that there does not exist as of the
date hereof a state of facts that would constitute an "Event of
Default" under this Agreement or the Debenture (collectively, all such
defaults being hereinafter referred to as "Defaults"), or which would,
with notice or lapse of time, or both, constitute such a Default, and
the Company is not in default under the terms, conditions or
provisions of its Articles of Incorporation, as amended, its By-laws,
or any indenture, mortgage or deed of trust or other material
contract, agreement, lease, instrument, court order, judgment,
arbitration award, or decree to which it is a party or by which it is
bound or which state of facts would, with notice or lapse of time, or
both, constitute such a default (collectively, "Other Defaults");
(d) copies of (i) resolutions adopted by the Board of Directors
of the Company authorizing and approving this Agreement, the issuance
of the Debenture, the Warrants, the shares of Class B Preferred Stock
into which the Debenture may be converted, assuming the closing of the
Class B Preferred Stock Financing (the "Conversion Preferred Shares"),
upon the filing of the Articles Amendment (as defined below), the
shares of Common Stock into which the Debenture may be converted as
set forth in the Debenture (the "Conversion Common Shares"), upon the
filing of the Articles Amendment, the shares of Common Stock to be
issued as interest on the Debenture (the "Interest Common Shares")
and, upon the filing of the Articles Amendment, the shares of Common
Stock to be issued upon exercise of the Warrants (the "Warrant Common
Shares"), and the consummation of all other transactions contemplated
hereby, as and to the extent required by applicable law, and (ii)
action by partial written consent of the shareholders of the Company
representing more than 50% of the outstanding voting securities of the
Company (the "Majority Shareholders") approving, among other matters,
an amendment (the "Articles Amendment") to the Company's Amended and
Restated Articles of Incorporation, as amended (as further amended by
the Articles Amendment, the "Articles of Incorporation"), to increase
the authorized capital stock of the Company, all such resolutions and
written consents being certified by the Secretary of the Company;
(e) copies of the Company's Articles of Incorporation and By-laws
as then in effect, all certified by the Secretary of the Company;
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(f) a Subsistence Certificate for the Company issued by the
Secretary of the Commonwealth of the Commonwealth of Pennsylvania,
dated January 23, 1998;
(g) an opinion letter, from Cozen and O'Connor, counsel to the
Company, addressed to the Investor, dated the date hereof, in form and
substance satisfactory to the Investor;
(h) a certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the Company's
officers and directors;
(i) an unqualified opinion of KPMG Peat Marwick LLP on the
Company's financial statements for the fiscal year ended December 31,
1996; and
(j) a receipt for the full amount of the Purchase Price, before
deduction of the fees and expenses payable under Section 13.6.
2.2 DELIVERIES OF THE INVESTOR AT THE CLOSING. Concurrently with the
execution of this Agreement, the Investor shall (i) pay the Purchase Price (less
fees and expenses payable under Section 13.6 for which the Investor has
submitted invoices at least one business day prior to the date hereof) to the
Company by wire transfer of immediately available funds in accordance with the
Company's written wire instructions, and (ii) deliver to the Company a receipt
for the fees and expenses deducted from the Purchase Price.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the date of this
Agreement, the Company represents and warrants to the Investor (regardless of
any investigation made or information obtained by the Investor), as a material
inducement to the Investor to enter into this Agreement, as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. The Company is duty qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction listed
in Schedule 3.1 attached hereto, such jurisdictions being all the jurisdictions
------------
in which it owns or leases properties or conducts any business so as to require
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company. The minute books and stock records of
the Company are complete and accurate in all material respects and all
signatures included therein are the genuine signatures of the persons whose
signatures are required. As used in this Agreement, "material adverse effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations, liabilities, or financial condition of the
Company, taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith.
3.2 SUBSIDIARIES, ETC. Except as set forth in Schedule 3.2, the
------------
Company has no subsidiaries and does not own any capital stock, security,
partnership interest or other interest of any kind in any corporation,
partnership, joint venture, association or other entity.
3
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3.3 CAPITALIZATION. As of the date of this Agreement, and after
giving effect to the Articles Amendment, the Company's authorized capital stock
consists of (a) 50,000,000 shares of Common Stock, of which 14,183,835 shares
are issued and outstanding, 6,500,000 shares are reserved and available for
issuance pursuant to the Company's stock option and purchase plans, each
outstanding grant of which is described in Schedule 3.3, at the exercise prices
------------
set forth on Schedule 3.3., and 6,963,351 shares are available for issuance
-------------
pursuant to currently outstanding options and warrants granted outside of the
Company's stock option and purchase plans, each of which is described in
Schedule 3.3, and (b) 31,523,684 shares of Preferred Stock, of which 6,523,684
- ------------
shares are designated Class A Convertible Preferred Stock, par value $.01 per
share (the "Class A Preferred Stock"), of which no shares are issued and
outstanding and all of which are reserved for issuance upon the exercise of all
the warrants (collectively, the "Prior Warrants") to purchase Class A Preferred
Stock at the exercise prices set forth in Schedule 3.3. There are no treasury
------------
shares held by the Company. All outstanding shares of capital stock of the
Company have been, or upon issuance will be, validly issued, fully paid and
nonassessable. Except as disclosed in Schedule 3.3, no shares of capital stock
------------
of the Company are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company or were issued in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state, provincial or municipal securities laws. Except as set forth
in this Section 3.3 or in Schedule 3.3, as of the date of this Agreement, (i)
------------
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company is obligated to register the
sale of any of its securities under the Securities Act (except this Agreement)
and (iv) there are no outstanding securities of the Company which contain any
redemption or similar provisions, or any contracts, commitments, understandings
or arrangements by which the Company is or may become bound to redeem or
purchase a security of the Company. Except as disclosed in Schedule 3.3, there
------------
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Debenture, the Warrants or any
Conversion Shares (collectively, the "Securities"). The Company has furnished
to the Investor true and correct copies of the Company's Articles of
Incorporation and By-laws, and the terms of all securities convertible into or
exercisable for any shares of capital stock of the Company and the material
rights of the holders thereof in respect thereto. A current shareholders' list
giving the names, addresses and number of shares of capital stock of the Company
owned by each shareholder of the Company is attached hereto as part of Schedule
--------
3.3.
- ---
3.4 AUTHORIZATION. Subject to the filing of the Articles Amendment,
which shall occur on December 29, 1997 (the "Effective Date"), the Company has
all necessary corporate power and authority to enter into and perform this
Agreement, the Debenture, the Warrants and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "Transaction Documents"), and to issue and
deliver the Securities in accordance with the terms hereof and thereof. The
4
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execution, delivery and performance of the Transaction Documents by the Company
and the consummation of the transactions contemplated hereby and thereof,
including, without limitation, the issuance and sale of the Debenture and the
Warrants, and the issuance of the Conversion Preferred Shares (assuming the
closing of the Class B Preferred Stock Financing), the Conversion Common Shares,
the Interest Common Shares and the Warrant Common Shares (collectively, the
"Conversion Shares"), have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its shareholders except in connection with the
authorization and issuance of the Class B Preferred Stock, the terms of which
are still being negotiated in connection with the Class B Preferred Stock
Financing. The Transaction Documents have been duly executed and delivered by
the Company. Each of the Transaction Documents constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to or affecting generally the enforcement
of creditors' rights and remedies.
3.5 ISSUANCE OF SECURITIES. The Debenture and the Warrants are duly
authorized for issuance and sale to the Investor by the Company pursuant hereto
and, upon issuance in accordance with the terms hereof, shall be valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies. Upon the Effective
Date, the Conversion Common Shares will have been duly authorized and reserved
for issuance upon conversion of the Debenture and upon such issuance the
Conversion Common Shares will be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
Upon the Effective Date, the Interest Common Shares will have been duly
authorized and reserved for issuance in accordance with the terms and conditions
of this Agreement and the Debenture and, upon such issuance will be fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof. Upon the Effective Date, the Warrant Common Shares will have
been duly authorized and reserved for issuance upon exercise of the Warrants in
accordance with the terms and conditions of this Agreement and the Warrants, and
upon such issuance will be fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof. Subject to the filing, if
required, of a Form D, the issuance by the Company of the Securities is exempt
from registration under the Securities Act.
3.6 CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS. Except as
described on Schedule 3.6, the Company is not a party to or bound by any
------------
written, oral or implied contract, agreement, lease, power of attorney,
guaranty, surety arrangement, or other commitment in excess of $50,000
including, but not limited to, any contract or agreement for the purchase or
sale of merchandise or for the rendering of services, but excluding any purchase
orders to the Company in the normal course of its business.
3.7 BREACH. The Company is not in violation or breach of any of the
terms, conditions or provisions of the Articles of Incorporation or the By-laws,
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract,
5
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agreement, lease, instrument, court order, judgment, arbitration award or decree
to which it is a party or by which it is bound.
3.8 EMPLOYEES, OFFICERS AND DIRECTORS. A current list of the names
and addresses of all officers and directors of the Company is attached hereto as
Schedule 3.8. Except as described on Schedule 3.8, the Company has not entered
- ------------ ------------
into any employment or other agreements with any of its employees, officers or
directors, or any of its former employees, officers or directors.
3.9 COMPLIANCE WITH LAWS. Except as described in Schedule 3.9, the
------------
Company is in compliance with all existing requirements of laws, including but
not limited to federal, state, local and foreign laws, rules and regulations,
and all existing requirements of all governmental bodies or agencies having
jurisdiction over it, the failure to comply with which might have a material
adverse effect on the Company, its assets, business or prospects.
3.10 CONFLICT WITH DOCUMENTS. Except as disclosed in Schedule 3.10 or
-------------
as explicitly provided in this Agreement, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation of
the transactions contemplated hereby and thereby (including, without limitation,
the reservation for issuance and the issuance of the Conversion Shares other
than the Conversion Preferred Shares), either immediately or with the passage of
time or the giving of notice or both, will not:
(a) conflict with or cause a material breach or an Event of
Default under any of the terms, conditions or provisions of, result in
a termination or modification of, or cause any acceleration of any
obligation of the Company under any material contract, lease or other
instrument to which the Company is bound or by which any of the
Company's properties or assets may be affected;
(b) subject to the filing of the Articles Amendment on the
Effective Date, result in a violation of the Articles of Incorporation
or the By-laws or any statute, law, rule or regulation or any order,
judgment or decree to which the Company or any of its properties or
assets are subject; or
(c) result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material
properties or assets.
3.11 FINANCIAL STATEMENTS. The Company has furnished to the Investor
copies of its audited annual financial statements for the fiscal year ended
December 31, 1996, and its unaudited financial statements for each month in 1997
through October and for the year of 1997 through October 31, 1997, all of which
are attached hereto as Schedule 3.11. The audited and unaudited financial
-------------
statements referred to above are correct and in accordance with the Company's
books and records, and each presents fairly, in all material respects, the
Company's financial position at the end of the period specified and the results
of its operations and financial condition for such period, subject to normal
recurring adjustments.
3.12 TAXES. The Company has filed all applicable federal, state,
local and foreign tax returns required to be filed to date, in accordance with
the provisions of law
6
<PAGE>
pertaining thereto, and has paid all taxes, interest, penalties and assessments
required to have been paid to date. The Company has not been advised that any of
its returns, whether federal, state, local or foreign, have been or are being
audited as of the date hereof.
3.13 LITIGATION. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its properties or rights,
the Common Stock or any of the Company's officers or directors in their
capacities as such.
3.14 INTANGIBLE PROPERTY. Except as set forth on Schedule 3.14, the
-------------
Company has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company, all permits,
licenses and other authority, necessary to the conduct of its business as
presently constituted and conducted, and as proposed to be constituted and
conducted.
3.15 TRADEMARKS, PATENTS, ETC. The corporate names of the Company,
and the trade names, trademarks, and service marks listed on Schedule 3.15 are
-------------
the only names and marks which are used by the Company in the operation of its
business. Except as set forth on Schedule 3.15, no claim has been asserted
-------------
against the Company involving any conflict or claim of conflict of its trade
names, trademarks or service marks or with the trade names, trademarks, service
marks or corporate names of others, and, to the best of the knowledge of the
Company and except as set forth on Schedule 3.15, there is no basis for any such
-------------
claim of conflict. Except as set forth on Schedule 3.15 and to the best of the
-------------
knowledge of the Company, the Company is the sole and exclusive owner of its
trade names, trademarks and service marks and has the sole and exclusive right
to use such trade names, trademarks and service marks. The Company is the
registered owner of the United States and foreign patents listed on Schedule
--------
3.15 and has applications pending with the U.S. Patent Office and/or foreign
- ----
patent offices for the patents listed on Schedule 3.15 as being patents pending.
-------------
The Company has no knowledge of any adverse claim of any kind with respect to
any of such patents or patent applications, nor does it have any knowledge, or
reason to know, that a patent will not issue on any such patent application.
Except as set forth on Schedule 3.15 and to the best of the knowledge of the
-------------
Company, no process used by the Company or any product manufactured or sold by
the Company infringes upon any patent, patent application, trademark, trade name
or service mark of any other party. There has been no claim of infringement of
and, to the best of the knowledge of the Company and except as set forth on
Schedule 3.15, the Company is not infringing on any third party's patent,
- -------------
license, trademark, trade name, service mark, copyright or other proprietary
right.
3.16 ENVIRONMENTAL LAWS. (i) The Company (x) is in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety or emissions, discharges,
releases, threatened releases, removal, remediation or abatement of pollutants,
contaminants, chemicals or industrial, hazardous or toxic substances or wastes
into or in the environment (including without limitation air, surface water,
ground water or land), or otherwise used in connection with the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous or toxic substances or wastes,
as defined under such applicable laws ("Environmental
7
<PAGE>
Laws"), (y) has received all permits, licenses or other approvals required of it
under applicable Environmental Laws to conduct its business and (z) is in
compliance with all terms and conditions of any such permit, license or
approval, except to the extent that the matters within clauses (x), (y) or (z)
above would not have a material adverse effect.
(ii) There is no substance designated a "hazardous substance" by any
Environmental Law, including asbestos, petroleum, urea formaldehyde insulation
and petroleum by-products ("Hazardous Substance") present at any of the real
property currently owned or leased by the Company, except to the extent that
such presence could not reasonably be expected to have a material adverse
effect; and with respect to such real property, to the knowledge of the Company,
there has not occurred (x) any release or any threatened release of a Hazardous
Substance or (y) any discharge or threatened discharge of any Hazardous
Substance into the ground, surface or navigable waters, which discharge or
threatened discharge violates any federal, state, local or foreign laws, rules
or regulations concerning water pollution.
(iii) The Company has not disposed of, transported, or arranged for
the transportation or disposal of any Hazardous Substance where such disposal,
transportation or arrangement would give rise to liability pursuant to any
Environmental Law other than any such liabilities that could not reasonably be
expected to have a material adverse effect.
(iv) To the knowledge of the Company, there are no underground storage
tanks, asbestos-containing materials, polychlorinated biphenyls or urea
formaldehyde insulation at any of the real property currently owned or leased by
the Company in violation of any Environmental Law.
3.17 INSURANCE. The Company maintains insurance on all of its
insurable properties as listed on Schedule 3.17 attached hereto. All such
-------------
insurance policies are in full force and effect and the Company is not in
default of any provision thereof. The Company has not received notice from the
issuer of any such insurance policies of its intention to cancel or refusal to
renew any policy issued by it.
3.18 GOVERNMENTAL CONSENT. No permit, consent, approval or
authorization of, or filing with, any governmental regulatory authority or
agency is required of the Company in connection with the execution, delivery and
performance of the Transaction Documents, or the consummation of the
transactions contemplated hereby and thereby, except as may be required by any
federal or state securities laws, with which the Company will comply.
3.19 LIABILITIES. The Company has no liabilities, whether related to
tax or non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, or otherwise, except (i) as provided in the
balance sheet of the Company as of October 31, 1997 set forth at Schedule 3.11,
-------------
(ii) as set forth on Schedule 3.19 or (iii) for liabilities of a non-material
-------------
nature incurred in the normal course of the Company's business since that date.
3.20 ASSETS. The Company has good and marketable title to all of its
assets free and clear of all liens, charges, claims, encumbrances and defects of
any kind or character, except as set forth on Schedule 3.20 (collectively,
-------------
"Permitted Liens"). To the best of the
8
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knowledge of the Company, all equipment, furniture and fixtures, and other
tangible personal property of the Company are in good operating condition and
repair and do not currently require any repairs other than normal routine
maintenance to maintain such property in good operating condition and repair.
3.21 CONFLICTING INTERESTS. Except as set forth on Schedule 3.21 no
-------------
director, officer, or any relative or affiliate of any director or officer, or,
to the best of the knowledge of the Company, any employee or shareholder of the
Company or any relative or affiliate of any of the employees or shareholders (a)
has any pecuniary interest in any supplier or customer of the Company or in any
other business enterprise with which the Company conducts business or with which
the Company is in competition; or (b) is indebted to the Company for money
borrowed.
3.22 NO PAYMENTS TO SHAREHOLDERS OR OTHERS. Except as set forth on
Schedule 3.22, there has not been any purchase or redemption of any shares of
- -------------
stock of the Company by the Company or any transfer, distribution or payment by
it, directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payments made in the ordinary
course of business for goods and services in arm's length transactions, and (ii)
wages paid to non-executive employees. The salaries and benefits payable to the
officers of the Company have not been increased since May 31, 1997.
3.23 Absence of Material Changes. Except as set forth in Schedule
--------------------------- --------
3.23 attached hereto, since December 31, 1996:
- ----
(a) there has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or
affairs of the Company or any material physical damage or loss to any
of its properties or assets or to the premises occupied by it (whether
or not such damage or loss is covered by insurance);
(b) the Company has not taken any action outside of the ordinary
and usual course of its business, except as related to the
transactions contemplated hereby;
(c) the Company has not borrowed any money or become contingently
liable for any obligation or liability of others;
(d) the Company has paid all of its debts and obligations as they
became due;
(e) except for the Debenture to be issued hereunder, the Company
has not incurred any debt, liability or obligation of any nature to
any party, except for obligations arising from the purchase of goods
or the rendition of services in the ordinary course of business;
(f) the Company has not knowingly waived any right of substantial
value;
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(g) the Company has maintained its books, accounts and records in
the usual, customary and ordinary manner; and
(h) the Company has used its best efforts to preserve its
business organization intact, to keep available the services of its
employees, and to preserve its relationships with its customers,
suppliers and others with whom it deals.
3.24 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. No provisions in
the Transaction Documents relating to the Company or any other document,
schedule, exhibit or other information furnished by the Company to the Investor
in connection with the execution, delivery and performance of the Transaction
Documents, or the consummation of the transactions contemplated hereby and
thereby, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated in order to
make the statement, in light of the circumstances in which it is made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF INVESTOR AND RESTRICTIONS ON
TRANSFER.
4.1 REPRESENTATIONS AND WARRANTIES BY THE INVESTOR. The Investor
represents and warrants to the Company as follows:
(a) The Investor (i) is acquiring the Debenture and the Warrants
and (ii) upon conversion of the Debenture or the Class B Preferred
Stock, or upon exercise of the Warrants, will acquire the applicable
Conversion Shares then issuable, for investment for its own accounts
and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands that the
Securities have not been registered under the Securities Act, or under
any state securities or "Blue Sky" laws, and, as a result, are subject
to substantial restrictions on transfer. The Investor acknowledges
that the Securities must be held indefinitely unless subsequently
registered under the Securities Act and any applicable state
securities or "Blue Sky" laws, or exemptions from registration under
the Securities Act and such laws are available; provided, however,
that by making the representations herein, the Investor does not agree
to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an
exemption from registration under the Securities Act and any
applicable state securities or "Blue Sky" laws.
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors rights and
to general equity principles.
(c) The Investor is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D under the Securities Act.
10
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(d) The Investor is an "accredited investor" under the
regulations under the Texas Securities Act of 1957 (the "Texas
Securities Act") and, accordingly, the offer and sale of the
Securities to the Investor is an exempt transaction pursuant to
Section 5(T) of the Texas Securities Act.
4.2 LEGENDS. The Investor understands that the certificates or other
instruments representing the Debenture and the Warrants and, until such time as
the sale of the Conversion Shares have been registered under the Securities Act,
the stock certificates representing the Conversion Shares, except as set forth
below, shall bear a restrictive legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND SUCH LAWS.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the Securities Act, (ii) in connection
with a sale transaction, such holder provides the Company with an opinion of
counsel, in a form reasonably acceptable to the Company's counsel, to the effect
that a public sale, assignment or transfer of such Securities may be made
without registration under the Securities Act, or (iii) such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company's counsel that such Securities can be sold pursuant to Rule 144(k)
promulgated under the Securities Act (or a successor rule thereto) ("Rule 144").
The Investor acknowledges, covenants and agrees to sell the Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement effective under the Securities Act, or
(ii) advice of counsel that such sale is exempt from registration required by
Section 5 of the Securities Act.
5. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in Sections 3.3, 3.4 and 3.5 hereof
shall survive the consummation of the transactions provided for in the
Transaction Documents and shall not terminate. All other representations and
warranties contained herein shall survive the consummation of the transactions
provided for in the Transaction Documents for a period beginning on the date
hereof up to and including the earlier of the conversion of all Class B
Preferred Stock held by the Investor into Common Stock or December 31, 1999;
provided, however, that such period shall not end prior to December 31, 1998.
No such representation or warranty shall be deemed to have been waived, affected
or impaired by any investigation made by any person or persons.
6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants to
comply with the following affirmative covenants, unless waived by the Investor
(or Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed
to have also waived such covenant), as long as the Debenture remains
outstanding; provided, however, that in the event the Debenture is converted
into shares of Class B Preferred Stock, the Company shall provide to the
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Investor all such information and rights as the Company provides to any other
holder of Class B Preferred Stock, whether pursuant to the Company's Articles of
Incorporation, as amended, contract or otherwise; and provided, further, that
the Company shall comply with Section 6.2, unless waived by the Investor (or
Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed to
have also waived such covenant), until the earlier of (i) such time as the
Investor owns no Debenture, no Warrants, no Class B Preferred Stock and fewer
than 100,000 shares of Common Stock or (ii) the closing of an underwritten
initial public offering of any of the Company's securities under the Securities
Act (or any successor statute), yielding gross proceeds to the Company of at
least $7,500,000.
6.1 FINANCIAL STATEMENTS. The Company shall furnish to the Investor
the following financial statements, reports and other documents, such financial
statements to be prepared in accordance with generally accepted accounting
principles consistently applied, certified by the Company's chief executive or
financial officer:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of the Company, a balance sheet of the
Company as of the end of such fiscal year and related statements of
operations, shareholders' equity and cash flows for such fiscal year,
all in reasonable detail and setting forth in comparative form the
figures as of the end of and for the previous fiscal year, which
financial statements shall have been audited, and shall be accompanied
by an unqualified opinion addressed to the Company from "Big Six"
independent auditors or other independent auditors that are reasonably
satisfactory to the Investor, together with a copy of such auditors'
letter to Company's management;
(b) as soon as available, and in any event within 20 days after
the end of each month for such month and for the year to date, an
unaudited balance sheet and unaudited statements of operations,
shareholders' equity and cash flows, together with a comparison of
such financial statements with the budget of the Company for such
period; and
(c) as soon as available, and in any event at least 60 days prior
to the end of each fiscal year of the Company, an annual budget and
business plan for the subsequent fiscal year, which budget and
business plan shall include a monthly breakdown of financial
statements, which breakdown shall include the underlying assumptions
and a brief qualitative description of the Company's plan by the
Company's Chief Executive Officer in support of such budget and
business plan, which also shall have been approved and accepted by the
Board of Directors of the Company. If during the course of operations
for any such month it becomes apparent that deviations from such
financial statements, budget and business plan have occurred, the
Company shall submit to its Board of Directors a statement of such
deviation within five business days from the date of the Company's
knowledge of such deviation (the "Statement"). The Statement shall
detail the manner in which a new financial projection deviates from
the annual business plan and the reason therefor. The Board of
Directors shall have the right to ask questions or request any other
reasonable additional information with respect to the Statement. Any
and all subsequent deviations from such financial
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statements shall be resubmitted to the Board of Directors of the
Company for approval and acceptance or for required further revision
until such approval and acceptance is obtained.
In the event that the Company at any time hereafter is required, by law or by
generally accepted accounting principles, to consolidate its financial
statements with those of a subsidiary corporation, the Company shall thereafter
finish the financial statements required by this Section 6.1 on a consolidated
basis, and the monthly and annual financial statements specified above shall be
furnished with consolidating financial statements.
6.2 ADDITIONAL INFORMATION.
(a) The Company shall, as promptly as possible (but, in any event
within ten days) after obtaining knowledge of the occurrence of any
"Default" (as such term is defined in Section 2.1(c) above), or any
other material adverse development or event, furnish the Investor with
a detailed written notice of such default or event and the proposed
response of Company management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the
Investor with notice of all material actions, suits and proceedings
before any court or governmental agency, commission, board, bureau,
department or instrumentality, domestic or foreign, affecting the
Company.
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or
directors of the Company, and all written consents taken by the
shareholders and/or directors of the Company.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the
same, furnish the Investor with all reports and financial statements
that the Company shall send or make available to the shareholders or
the directors of the Company or the Securities and Exchange
Commission.
(e) The Company shall promptly furnish the Investor with copies
of all material contracts, indentures, instruments and agreements the
Company provides to any investor in the Class B Preferred Stock
Financing or in any other additional bridge financing, when such
documents are provided to such investor.
(f) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the
condition of operations, financial or otherwise, of the Company as the
Investor may, from time to time, reasonably request.
(g) The Investor agrees not to disclose to third parties any
information concerning the Company which is furnished to the Investor
by the Company and designated as confidential, except as required by
law, legal process or its fiduciary
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duty to report financial and business information to its partners,
shareholders, directors or affiliates and to such other persons as the
Investor, in the exercise of its prudent business judgment, may select
and shall use reasonable commercial efforts to have such persons
maintain such confidentiality of the confidential information. The
term "confidential information" does not include information which (i)
was or becomes generally available to the public other than as a
result of a disclosure by the Investor, or (ii) was or becomes
available to the Investor on a non-confidential basis from a source
other than the Company, provided that such source is not bound by a
confidentiality agreement with the Company.
6.3 INSPECTION. The Company shall permit, at any reasonable time and
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION AND BY-LAWS. The
Company shall perform and observe all the obligations and provisions set forth
in the Articles of Incorporation and the By-laws.
6.5 MAINTAIN RIGHTS AND FACILITIES. The Company shall maintain and
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
6.6 BOOKS AND RECORDS. The Company shall make and keep books,
records and accounts, which, in reasonable detail accurately and fairly reflect
its transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (a) transactions are
executed in accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of the financial
statements required herein and to maintain accountability for assets; and (c)
access to assets is permitted only in accordance with management's general or
specific instructions and recorded assets are compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
difference.
6.7 OTHER INSURANCE. The Company shall maintain insurance against
such risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.8 CONTRACTS AND AGREEMENTS. The Company shall comply in all
material respects with the provisions of all material contracts, indentures,
instruments and agreements to which it is a party or by which the Company or its
properties are bound, and with all other material obligations which the Company
incurs or to which it becomes subject.
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6.9 TAXES. The Company shall pay and discharge when due all federal,
state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
however, that the Company may in good faith contest any tax, assessment,
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.10 COMPLIANCE WITH LAWS. The Company shall comply with all laws,
rules and regulations of all governmental authorities and agencies applicable to
the Company, its business or its properties, the failure to comply with which
might have a material adverse effect on the Company.
7. NEGATIVE COVENANTS. The Company hereby covenants that as long as the
Debenture remains outstanding the Company shall comply with the following
negative covenants unless such covenant is waived by the Investor; provided,
however, that a waiver of any covenant or the approval of any action hereunder
by Atlantic Coastal Ventures, L.P. ("Atlantic") shall be deemed to constitute a
waiver of such covenant or approval of such action by the Investor.
7.1 CONDUCT OF BUSINESS. The Company shall not:
(a) (i) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation
or other entity or entities; (ii) reorganize, dissolve or liquidate
the Company, or adopt any plan of reorganization, dissolution or
liquidation of the Company; (iii) sell, assign or otherwise dispose of
all or any substantial portion of its assets; or (iv) acquire all or
any substantial portion of the voting stock or assets of another
corporation or other entity or entities; provided, however, the
Company may complete its proposed acquisition of VIONA Development
Hard- & Software Engineering, GmbH, with the cash portion of the
purchase price not to exceed $2,500,000 (excluding any applicable
taxes that the Company has agreed to assume);
(b) except as otherwise required, permitted or acknowledged by
this Agreement or any Schedule hereto, create, authorize or issue any
additional shares of capital stock or any rights to acquire any shares
of capital stock or any other security, or repurchase any shares of
its capital stock except from employees upon termination of
employment;
(c) incur, create, assume or guarantee any indebtedness which
ranks senior or pari passu in the right of payment to the Debenture,
other than additional pari passu bridge financing of up to $750,000 on
the same terms and considerations contemplated hereby, which the
Company may obtain following the execution of this Agreement;
(d) except as contemplated by this Agreement, amend the Articles
of Incorporation or the By-laws; or
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(e) effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the
conduct of the business of the Company, as such business is conducted
and proposed to be conducted.
7.2 LIENS AND ENCUMBRANCES. Except for Permitted Liens (as defined
in Section 3.20), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent.
7.3 DIVIDENDS. The Company shall not declare or pay any dividend
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than as required, permitted
or acknowledged by this Agreement or the Articles of Incorporation.
7.4 AGREEMENTS. The Company shall not enter into any contract,
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Debenture, or
which otherwise restricts, in any material respect, the Company's ability to
perform under the Transaction Documents.
7.5 INSIDER TRANSACTIONS. Except as disclosed in Schedules 3.21 and
--------------
3.22, the Company shall not enter into any transaction with any of its officers,
- ----
directors or shareholders, unless such transaction is an arm's-length
transaction on fair and reasonable terms, and shall not increase in any way the
compensation payable, directly or indirectly, to any of the Company's officers.
7.6 CAPITAL EXPENDITURES. The Company shall not incur, in any
twelve-month period, capital expenditures (including expenditures for
capitalized leases) in excess of $150,000 or any single capital expenditure in
excess of $60,000, unless such expenditures were explicitly included in an
approved budget of the Company. Notwithstanding the foregoing, the Company
shall obtain the prior written approval of the Investor with respect to any
expenditure submitted to NEPA Venture Fund II, L.P. ("NEPA II") for its
approval.
7.7 PAYMENTS, NO DEFAULT. The Company shall make all required
payments of rent, taxes, debts and other material obligations of the Company
promptly when due. The Company shall not be in default with respect to any
material contracts, agreements or instruments to which the Company is a party or
by which the Company is bound.
7.8 MATERIAL CONTRACTS. The Company shall not, during any fiscal
year of the Company, enter into material contracts, other than in the ordinary
course of business, pursuant to which the Company would incur liabilities in
excess of $50,000 individually or $100,000 in the aggregate, unless the Board of
Directors of the Company has previously approved the execution of such contracts
or such contracts were explicitly included in an approved budget of the Company.
Notwithstanding the foregoing, the Company shall obtain the
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prior written approval of the Investor with respect to any material contracts
submitted to NEPA II for its approval.
8. REGISTRATION AND RELATED RIGHTS.
8.1 PIGGYBACK REGISTRATION.
(a) As used in this Section 8, "Registration Stock" shall mean
any Securities or any other shares of Common Stock, Class B Preferred
Stock or other securities received by holders of the Securities upon
any stock split, stock dividend, recapitalization, merger,
consolidation or similar event; provided, however, that Registration
Stock shall not include any Securities or such other securities
disposed of pursuant to one or more registration statements under the
Securities Act, or which have been sold pursuant to Rule 144 (as
previously defined) or which have otherwise been sold without
registration under the Securities Act. For purposes of this Section 8,
any record holder of securities convertible into Registration Stock
(or exercisable for or payable in Registration Stock) shall be deemed
to be the holder of the Registration Stock issuable upon such
conversion and/or exercise and/or payment.
(b) If the Company should seek to register under the Securities
Act or qualify any of the securities holdings of the Company or any of
its shareholders (except in connection with any stock option plan,
stock purchase plan, savings or similar plan or an acquisition, merger
or exchange of stock, to be registered on Forms S-4, S-8 or any
successor forms under the Securities Act) and if the form of
registration statement proposed to be used otherwise may be used for
the registration of the Registration Stock, then, on each such
occasion, the Company shall furnish the Investor with at least 30 days
prior written notice thereof. At the written request of the Investor,
given within 20 days after the receipt of such notice, the Company
will use its best efforts to cause all of the Registration Stock for
which registration shall have been requested by the Investor to be
included in such registration statement. In the event that the
proposed registration by the Company is, in whole or in part, an
underwritten public offering of securities of the Company, and the
managing underwriter determines and advises in writing that the
inclusion of all Registration Stock proposed to be included in the
underwritten public offering and other issued and outstanding shares
of Common Stock proposed to be included therein by persons other than
(i) holders of Registration Stock or (ii) holders of Subordinate
Shares (as defined in Section 8.4) with rights equal to those of the
holders of Registration Stock ("Other Registration Stock") (such other
shares which are not Registration Stock or Other Registration Stock
being the "Other Shares") would interfere with the successful
marketing (including pricing) of the securities, then the number of
shares of Registration Stock, Other Registration Stock and Other
Shares to be included in such underwritten public offering shall be
reduced first, pro rata among the holders of Other Shares; second, if
necessary, pro rata among the holders of Registration Stock and Other
Registration Stock combined, based on the number of shares requested
by holders thereof to be registered in such underwritten public
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offering; and lastly, if necessary, among the Company's shares
requested by the Company to be registered; provided, however, that the
holders of Registration Stock do not then elect to exercise their
rights under Section 8.2; and, further provided, that in no event,
without the consent of the holders of at least 67% of the Registration
Stock, shall the percentage of the Registration Stock that is included
in such registration statement be less than the percentage of the
securities of any other shareholder included therein. In the event
that the Company offers any of its securities in an offering exempt
from registration under the Securities Act pursuant to Regulation A,
the Company will provide to the holders of Registration Stock rights
comparable to those provided herein.
8.2 DEMAND REGISTRATION.
(a) After the closing of an underwritten offering of the Common Stock,
if at any time the Company is requested in writing by the holders of not
less than 67% of the Registration Stock to effect the registration under
the Securities Act of at least 33 1/3% of the Registration Stock, the
Company shall promptly give written notice of such proposed registration to
all record holders of Registration Stock. Such holders shall have the
right, by giving written notice to the Company within 30 days from receipt
of the Company's notice, to elect to have included in such registration
such of their Registration Stock as such holders may request in such notice
of election. Thereupon, the Company shall, as expeditiously as possible,
use its best efforts to effect the registration, on a form of general use
under the Securities Act, of all shares of Registration Stock which the
Company has been requested to register; provided, however, that if the
holders of not less than 67% of the Registration Stock shall so request
(and at least 50% of the Registration Stock is being registered), the
Company shall file such registration statement pursuant to Rule 415 or any
successor rule or regulation under the Securities Act so as to permit the
continuous or delayed offering of the Registration Stock in accordance with
the intended method of disposition specified in the notice of the exercise
of rights under this Section 8.2(a), to the extent such offering qualifies
under such rule or regulation, but in no event shall the Company be
required to maintain the effectiveness of such registration statement
beyond a two year period. The Company shall be obligated to cause to
become effective one registration statement pursuant to which Registration
Stock is sold under this Section 8.2(a).
(b) In addition and not in limitation of the rights set forth in
Sections 8.1(b) and 8.2(a), at such time as the Company shall have
qualified for the use of a short form Form S-3 in an offering solely for
the accounts of persons other than the Company (or any similar form or
forms promulgated by the Securities and Exchange Commission), the holders
of not less than 67% of the Registration Stock shall have the right to
request an unlimited number of registrations on Form S-3 or other similar
forms. Holders shall have the right, by giving written notice to the
Company within 20 days from receipt of notice from the Company of such
request, to elect to have included in such registration such of their
Registration Stock as such holders may request in such notice of election.
Thereupon, the
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Company shall, as expeditiously as possible, use its best efforts to effect
the registration, on Form S-3 of all shares of Registration Stock which the
Company has been requested to register. The Company shall not be required
to effect any such registration more than once every twelve months.
Registrations effected on Form S-3 shall not be considered to be demand
registrations pursuant to Section 8.2(a) hereof.
(c) The Company may include in a registration requested under this
Section 8.2 any additional authorized shares of the Common Stock of the
Company, whether or not issued, for sale by the Company or for sale by
others; provided, however, that such shares shall not be included to the
extent that the holders of a majority of the shares of Registration Stock
included therein determine in good faith that the inclusion of such shares
will interfere with the successful marketing of the shares of Registration
Stock to be included therein; and, provided, further, that, upon the
election of the holders of a majority of the shares of Registration Stock
included therein, or if the number of shares to be so included equals or
exceeds the number of shares of Registration Stock included therein by the
holders of Registration Stock, such registration shall be deemed to be a
registration pursuant to Section 8.1(b) hereof.
(d) The underwriter and the terms of the underwriting for any
registration pursuant to this Section 8.2 shall be mutually acceptable to
the Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to the
contrary:
(i) The Company reserves the right to delay any such registration
pursuant to Section 8 for a period of not more than sixty days, or to
withhold efforts to cause such registration statement to become
effective for a period of not more than sixty days, if the Board of
Directors of the Company determines in good faith that such
registration might (A) interfere with or affect the negotiation or
completion of any material transaction that is being contemplated by
the Company, or (B) involve initial or continuing disclosure
obligations materially adverse to the best interests of the Company's
shareholders. If, after a registration statement becomes effective,
the Company advises the holders of the Registration Stock covered by
such registration statement that the Company considers it appropriate
for the registration statement to be amended, the holders of such
shares shall suspend any further sales of their registered shares
until the Company advises them that the registration statement has
been amended. The time periods referred to in this Section 8 shall be
extended for an additional number of business days during which the
rights to sell shares was suspended.
(ii) The Company shall not be obligated to file a registration
statement pursuant to Section 8.2 within three months after the
effective
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date of any registration under which piggyback rights were granted
pursuant to Section 8.1.
8.3 FURTHER OBLIGATIONS OF THE COMPANY. Whenever the Company is
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to:
(a) prepare for filing and file with the Securities and Exchange
Commission promptly thereafter a registration statement and such
amendments and supplements to said registration statement and the
prospectus used in connection therewith as may be necessary to keep
said registration statement effective and to comply with the
provisions of the Securities Act with respect to the sale of
securities covered by said registration statement for the period
necessary (but, other than as otherwise provided in Section 8.2(a), in
no event more than nine months) to complete the proposed public
offering;
(b) furnish to each selling holder so requesting such copies of
preliminary and final prospectus and such other documents as said holder
may reasonably request to facilitate the public offering of such holder's
Registration Stock;
(c) use its best efforts to register or qualify the Registration Stock
covered by said registration statement under the securities or "Blue Sky"
laws of such jurisdictions as the holders of Registration Stock may
reasonably request, to keep such registration or qualification in effect
for so long as such registration statement remains in effect, and do any
and all other acts and things that may be reasonably necessary or advisable
to enable such seller to consummate the disposition in such jurisdictions
of its Registration Stock covered by such registration statement, except
that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it would not, but for the requirements of this subdivision (c), be
obligated to be so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any such
jurisdiction;
(d) furnish to the selling holders, and any underwriters or broker-
dealers through whom the Registration Stock may be sold, an opinion or
opinions of counsel for the Company and a "cold comfort" letter or letters
of the independent auditors for the Company, in form and substance
customary for similar offerings;
(e) permit each selling holder or the selling holder's counsel or
other representatives, at the selling holder's expense, to inspect and copy
such corporate documents and records as may reasonably be requested by
them;
(f) if so requested, furnish to each selling holder a copy of all
documents filed and all correspondence to or from the Securities and
Exchange Commission in connection with any such offering;
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(g) immediately notify each seller of Registration Stock covered by
such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, upon discovery that,
or upon the happening of any event as a result of which, the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and at the
request of any such seller or holder, prepare and furnish to such seller
and holder a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to
the purchasers of such Registration Stock, such prospectus shall not
include 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 not misleading in the light of the circumstances then existing;
(h) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of at least twelve months, but not
more than eighteen months, beginning with the first month of the first
fiscal quarter after the effective date of such registration statement,
which earnings statement shall satisfy the provisions of Section 13(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
(i) provide and cause to be maintained a transfer agent and registrar
for all registrable securities covered by such registration statement from
and after a date not later than the effective date of such registration
statement.
If requested by the Company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Securities and Exchange Commission in connection therewith.
8.4 REGISTRATION RIGHTS EQUAL OR SUPERIOR. The Company shall not
grant any registration rights or register any securities for the account of any
person other than holders of Registration Stock unless permitted to do so by the
written consent of the holders of not less than 67% of the Registration Stock
(such securities being the "Subordinate Shares").
8.5 EXPENSES, ETC. All expenses in connection with the preparation
and filing of any registration statement under this Section 8, any registration
or qualification under the securities or "Blue Sky" laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with "Blue Sky" or state securities
laws, (iii) other fees or expenses expressly applicable to securities
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being sold by the selling shareholder, and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 INDEMNIFICATION. The Company shall indemnify the selling holders
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock was registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto (unless cured by an amendment or supplement
to the prospectus delivered to the selling holders prior to the sales of the
Registration Stock that is subject to the claimed right of indemnification), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registration Stock
that is subject to the claimed right of indemnification); and will reimburse the
selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such selling holders in connection with
investigating or defending against such loss, claim, damage, liability or
action; except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such selling holders expressly for use
therein. In connection with any such registration statement, the selling
holders of Registration Stock will furnish the Company in writing such
information as may reasonably be requested by the Company for use in any such
registration statement or prospectus and will indemnify the Company, its
directors and officers, and, to the extent required in any agreement with any
underwriter or broker-dealer, each such underwriter or broker-dealer and each
person, if any, who controls the Company or any underwriter or broker-dealer
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities, expenses and actions in respect thereof (under the Securities Act
or common law or otherwise) caused by any untrue statement or alleged untrue
statement of a material fact required to be stated in such registration
statement or prospectus and necessary to make the statements therein not
misleading; and will reimburse the Company for any legal or other out-of-pocket
expenses reasonably incurred by it in connection with investigating or defending
against such loss, claim, damage, liability or action; but only to the extent
that such untrue statement or omission was contained in information so furnished
in writing by the selling holders of Registration Stock expressly for use
therein, and only to the extent of proceeds received by the selling holders of
Registration Stock in the offering. The Company further agrees and the selling
shareholders shall agree that, in connection with any underwritten public
offering, the Company also will enter into customary contribution arrangements
with the selling holders of Registration Stock and the underwriters or broker-
dealers through whom the Registration Stock may be sold, with respect to
situations in which indemnification is potentially unavailable.
8.7 WITHDRAWAL. If a public offering is not completed within nine
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1(b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company
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reserves the right, at its option, to withdraw from registration any securities
offered by the Company which have not been sold during such period, provided
that no securities offered by any holder of Registration Stock shall be
withdrawn without the consent of the holders of 50% of the Registration Stock.
8.8 EXCHANGE ACT. As promptly as possible following receipt of a
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the Exchange Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on the Nasdaq National Market,
as requested, and shall keep effective such registration and maintain such
listing or inclusion, and shall use its best efforts timely to file such
information, documents and reports as the Securities and Exchange Commission may
require or prescribe that the Company file in connection therewith. The Company
will, at the request of any holder of Registration Stock, advise such holder in
writing as to whether all reports required to be filed by the Company under
Section 13 of the Exchange Act during the 12 months preceding such request (or
for such shorter period as the Company was required to file such reports) have
been filed, and any other information which the holder may reasonably require in
order to comply with Rule 144, or any other comparable rule, as then in effect.
9. EVENTS OF DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:
9.1 DEFAULT ON PAYMENTS TO THE INVESTOR. The failure of the Company
to make (a) any principal or interest payment on the Debenture when due, or (b)
any other payment upon any other written obligation of the Company to the
Investor within 15 days after written notice from the Investor to the Company;
regardless of whether any such failure to make the payments described in (a) and
(b) above is due to a legal inability or the incapacity of the Company to make
any such payments.
9.2 INFORMATION, REPRESENTATIONS AND WARRANTIES. Any information
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
9.3 COVENANTS AND AGREEMENTS. The failure of the Company to observe,
perform or abide by any other covenant, warranty, agreement or provision in any
of the Transaction Documents, which failure is not cured to the Investor's
reasonable satisfaction within 30 days after written notice from the Investor to
the Company of its occurrence; provided, however, that no Event of Default shall
be considered to have occurred if the failure is not the failure to pay money
and is of such a nature that it reasonably cannot be cured within the Cure
Period, but if it is curable and the Company in good faith begins efforts to
cure it within the Cure Period and continues diligently to do so, the Company
shall have an additional 30 days from the date on which the Cure Period ends to
effect the cure. If the failure continues after the expiration
23
<PAGE>
of such additional 30 day period, regardless of whether such failure might be
curable at some time beyond such additional 30 day period, such failure shall
nevertheless be considered an Event of Default.
9.4 DEFAULT ON OTHER OBLIGATIONS. The occurrence of a material
default following the expiration of any applicable cure period, if any, in any
material obligation of the Company or any violation of law or refusal of
regulatory permission which has a material adverse effect on the Company's
operations.
9.5 CERTAIN EVENTS AS TO THE COMPANY. The Company shall (A) admit in
writing its inability to pay its debts generally as they become due; (B) file a
petition or answer or consent seeking relief under the Federal Bankruptcy Code,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy or insolvency law or other similar law, not discharged or
vacated or set aside or stayed within 45 days; (C) consent to the institution of
proceedings under any law referenced in (B) above, not discharged or vacated or
set aside or stayed within 45 days, or to the filing of any such petition, not
discharged or vacated or set aside or stayed within 45 days or to the
appointment or taking possession of a receiver, liquidator, assignee, trustee,
custodian (or other similar official) of the Company or any subsidiary or of any
substantial part of their property; (D) fail generally to pay its debts as such
debts become due, or take corporate action in furtherance of any such action;
(E) make an assignment for the benefit of its creditors; or (F) fail to meet any
of its material monetary obligations; provided, however, that no Event of
Default shall be considered to have occurred under subsection 9.5(F) if the
failure to meet such material monetary obligations is due to a good faith
dispute between such parties, which dispute shall continue for no more than 30
days; provided; further, that upon the expiration of such 30 day period, the
Company shall have, upon notice to the Investor an additional 30 day period to
resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time beyond such additional 30 day period, such failure under subsection
9.5(F) shall nevertheless be considered an Event of Default.
10. RIGHTS OF INVESTOR UPON DEFAULT.
10.1 RIGHTS ON DEFAULT. If there shall occur and be continuing an
Event of Default as defined in the foregoing Section 9, as long as the Debenture
is outstanding, the Investor may, by written notice to the Company, declare the
Company to be in default hereunder, whereupon, if the Investor so specifies in
such notice, the Debenture and all other indebtedness of the Company to the
Investor now or hereafter incurred, shall become immediately due and payable
without further demand, presentation or notice of any kind.
10.2 ADDITIONAL RIGHTS. The Investor shall have such additional
rights and remedies as are contained herein, in the Debenture, the Warrant, the
Class B Preferred Stock, or in any other documents and agreements delivered or
given in connection herewith, and all rights which it might have at law or
equity, all of which rights and remedies shall be cumulative.
11. LOCK-UP AGREEMENT. In the event that the Company determines to effect
an underwritten initial public offering, the Investor agrees that, for a period
of 180 days following the effective date of any registration filed in connection
therewith, the Investor will not directly
24
<PAGE>
or indirectly sell, transfer or otherwise dispose of, any shares of Class B
Preferred Stock, any shares of Common Stock, or any right to acquire shares of
Common Stock owned by the Investor without the prior written consent of the
underwriter(s) of such initial public offering.
12. FURTHER ASSURANCE. The Company and the Investor agree to execute and
deliver all such other instruments and take all such other actions as any party
may reasonably request from time to time after the date hereof and without
payment of further consideration, in order to effectuate the transactions
provided for herein. The parties shall cooperate fully with each other and with
their respective counsel and accountants in connection with any steps required
to be taken as part of their respective obligations under this Agreement.
13. MISCELLANEOUS.
13.1 WAIVERS AND AMENDMENTS. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
13.2 GOVERNING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
13.4 ENTIRE AGREEMENT. This Agreement and the other documents
delivered in connection with the transactions contemplated hereby or thereby
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and supersedes all prior
agreements, understandings, inducements or conditions, express or implied, oral
or written, except as herein or therein contained. The express terms hereof
control and supersede any course of performance and/or usage of trade
inconsistent with any of the terms hereof.
13.5 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly made and received when personally served, or when
mailed by first class mail or overnight, by courier service such as Federal
Express, postage prepaid, or telecopied with answer back receipt and hard copy
sent in the manner set forth above, addressed as set forth below:
(i) If to the Company, then to:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, PA 19355
25
<PAGE>
Telecopier No.: (610) 695-2592
Attn: President
with a copy, given in the manner prescribed above, to:
Cozen and O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
Telecopier No.: (215) 665-2013
Attn: Michael J. Heller, Esq.
(ii) If to the Investors, then to:
Donald Horton and Marty Horton
as community property
307 West 7th Street, Suite 1210
Fort Worth, TX 76102
Telecopier No:
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
13.6 PAYMENT OF EXPENSES. All reasonable legal fees and expenses
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof, not to exceed the aggregate amount
of $5,000, shall be paid by the Company from time to time promptly upon
submission of an invoice therefore.
13.7 BROKERS. Each party represents that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement (other than Lehman Brothers Inc. ("Lehman Brothers")) and neither
party is under any obligation to pay any finder's or broker's fee in connection
herewith (other than 9% of the Purchase Price payable by the Company to Lehman
Brothers). Each party will indemnify, defend and hold the other party harmless
from any claim based on breach of this representation.
13.8 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be
26
<PAGE>
effective only to the extent specifically set forth in writing, and that all
remedies, either under this Agreement or by law or otherwise, shall be
cumulative and not alternative.
13.9 TITLES. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
13.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
13.11 EXECUTION; COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
13.12 EXHIBITS; SCHEDULES. All Exhibits and Schedules attached
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
QUADRANT INTERNATIONAL, INC.
By: /s/ Gregg W. Garnick
---------------------------------------
Name: Gregg W. Garnick
Title: Chief Executive Officer
DONALD HORTON AND MARTY HORTON,
as community property
/s/ Donald Horton
-------------------------------------------------
DONALD HORTON
/s/ Marty Horton
-------------------------------------------------
MARTY HORTON
27
<PAGE>
EXHIBIT 4.11
QUADRANT INTERNATIONAL, INC.
CONVERTIBLE DEBENTURE AND WARRANT PURCHASE AGREEMENT
APRIL 7, 1998
<PAGE>
AGREEMENT, dated April 7, 1998, by and between QUADRANT INTERNATIONAL INC.,
a Pennsylvania corporation (the "Company"), and each of the INVESTORS who are
signatories hereto (individually, an "INVESTOR" and collectively, the
"INVESTORS").
W I T N E S S E T H
-------------------
WHEREAS, the Company is currently negotiating the sale of preferred stock
to one or more investors for an aggregate purchase price of at least $10,000,000
(the "Class B Preferred Stock Financing"), such stock to be designated as Class
B Convertible Preferred Stock of the Company (the "Class B Preferred Stock"),
the preferences, limitations and rights of which are currently being negotiated
but shall provide that the stock be convertible at the option of its holders,
from time to time and at any time, into fully paid, validly issued and
nonassessable shares of the common stock of the Company, par value $.01 per
share (the "Common Stock"), on a share for share basis; and
WHEREAS, the Company desires financing in the aggregate amount of $300,000
(the "Bridge Financing") to be used for general corporate purposes, including
working capital, pending the closing of the Class B Preferred Stock Financing;
and
WHEREAS, based on and subject to the terms and conditions of this
Agreement, each Investor is willing to provide a portion of the Bridge Financing
by acquiring from the Company, for the aggregate purchase price set forth
immediately below each Investor's name on the execution pages hereto (the
"Execution Pages"), (i) a debenture in the principal amount set forth
immediately below each such Investor's name on the Execution Pages (each a
"Debenture" and collectively the "Debentures") convertible, at the option of
each Investor, as set forth in the Debenture, into either shares of Class B
Preferred Stock or shares of Common Stock, and (ii) a warrant (each a "Warrant"
and collectively, the "Warrants") to purchase that number of shares of Common
Stock set forth immediately below each such Investor's name on the Execution
Pages.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE OF DEBENTURE AND WARRANTS.
1.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, the Company hereby issues and sells to each Investor, and each
Investor hereby purchases from the Company, the Debenture and the Warrant for
the purchase price (the "Purchase Price") set forth immediately below such
Investor's name on the Execution Pages.
1.2 THE DEBENTURE. Each Debenture shall be in the aggregate
principal amount set forth immediately below each such Investor's name on the
Execution Pages, shall become due and payable on May 31, 1998 unless earlier
terminated or converted as provided therein (the "Debenture Due Date"), shall
bear interest at the rate of 6% per annum from the date of issuance, which
interest shall be payable in arrears in shares of Common Stock on the Debenture
Due Date, and shall have such other terms and conditions as are set forth in the
form of Debenture attached hereto as Exhibit A.
---------
1.3 THE WARRANT. Each Warrant shall grant the Investor the right to
purchase from time to time and at any time for a period of three years from the
date of this Agreement up
<PAGE>
to the aggregate number of shares of Common Stock set forth immediately below
each such Investor's name on the Execution Pages, at an exercise price per share
and subject to such other terms and conditions as are set forth in the form of
Warrant attached hereto as Exhibit B.
---------
2. THE CLOSING.
2.1 DELIVERIES OF THE COMPANY. Concurrently with the execution of
this Agreement, the Company is delivering to each Investor:
(a) the Debenture;
(b) the Warrant;
(c) a certificate, executed by the President of the
Company, dated the date hereof, certifying that there does
not exist as of the date hereof a state of facts that would
constitute an "Event of Default" under this Agreement or the
Debentures (collectively, all such defaults being
hereinafter referred to as "Defaults"), or which would, with
notice or lapse of time, or both, constitute such a Default,
and the Company is not in default under the terms,
conditions or provisions of its Articles of Incorporation,
as amended, its By-laws, or any indenture, mortgage or deed
of trust or other material contract, agreement, lease,
instrument, court order, judgment, arbitration award, or
decree to which it is a party or by which it is bound or
which state of facts would, with notice or lapse of time, or
both, constitute such a default (collectively, "Other
Defaults");
(d) copies of (i) resolutions adopted by the Board of
Directors of the Company authorizing and approving this
Agreement, the issuance of the Debentures, the Warrants, the
shares of Class B Preferred Stock into which the Debentures
may be converted, assuming the closing of the Class B
Preferred Stock Financing (the "Conversion Preferred
Shares"), upon the filing of the Articles Amendment (as
defined below), the shares of Common Stock into which the
Debentures may be converted as set forth in the Debentures
(the "Conversion Common Shares"), upon the filing of the
Articles Amendment, the shares of Common Stock to be issued
as interest on the Debentures (the "Interest Common Shares")
and, upon the filing of the Articles Amendment, the shares
of Common Stock to be issued upon exercise of the Warrants
(the "Warrant Common Shares"), and the consummation of all
other transactions contemplated hereby, as and to the extent
required by applicable law, and (ii) action by partial
written consent of the shareholders of the Company
representing more than 50% of the outstanding voting
securities of the Company (the "Majority Shareholders")
approving, among other matters, an amendment (the "Articles
Amendment") to the Company's Amended and Restated Articles
of Incorporation, as amended (as further amended by the
Articles Amendment, the "Articles of Incorporation"), to
increase the authorized
2
<PAGE>
capital stock of the Company, all such resolutions and written
consents being certified by the Secretary of the Company;
(e) copies of the Company's Articles of Incorporation and By-laws
as then in effect, all certified by the Secretary of the Company;
(f) a Subsistence Certificate for the Company issued by the
Secretary of the Commonwealth of the Commonwealth of Pennsylvania,
dated as of a recent date;
(g) an opinion letter, from Cozen and O'Connor, counsel to the
Company, addressed to the Investor, dated the date hereof, in form and
substance satisfactory to the Investor;
(h) a certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the Company's
officers and directors;
(i) an unqualified opinion of KPMG Peat Marwick LLP on the
Company's financial statements for the fiscal year ended December 31,
1996; and
(j) a receipt for the full amount of the Purchase Price, before
deduction of the fees and expenses payable under Section 13.6.
2.2 DELIVERIES OF EACH INVESTOR AT THE CLOSING. Concurrently with the
execution of this Agreement, each Investor shall (i) pay the Purchase Price
(less fees and expenses payable under Section 13.6 for which the Investor has
submitted invoices at least one business day prior to the date hereof) to the
Company by wire transfer of immediately available funds in accordance with the
Company's written wire instructions, and (ii) deliver to the Company a receipt
for the fees and expenses deducted from the Purchase Price.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the date of this
Agreement, the Company represents and warrants to each Investor (regardless of
any investigation made or information obtained by such Investor), as a material
inducement to the Investor to enter into this Agreement, as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction listed
in Schedule 3.1 attached hereto, such jurisdictions being all the jurisdictions
------------
in which it owns or leases properties or conducts any business so as to require
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company. The minute books and stock records of
the Company are complete and accurate in all material respects and all
signatures included therein are the genuine signatures of the persons whose
signatures are required. As used in this Agreement, "material adverse effect"
means any material
3
<PAGE>
adverse effect on the business, properties, assets, operations, results of
operations, liabilities, or financial condition of the Company, taken as a
whole, or on the transactions contemplated hereby or by the agreements and
instruments to be entered into in connection herewith.
3.2 SUBSIDIARIES, ETC. Except as set forth in Schedule 3.2. the
------------
Company has no subsidiaries and does not own any capital stock, security,
partnership interest or other interest of any kind in any corporation,
partnership, joint venture, association or other entity.
3.3 CAPITALIZATION. As of the date of this Agreement, and after
giving effect to the Articles Amendment, the Company's authorized capital stock
consists of (a) 50,000,000 shares of Common Stock, of which [14,183,835] shares
are issued and outstanding, 6,500,000 shares are reserved and available for
issuance pursuant to the Company's stock option and purchase plans, each
outstanding grant of which is described in Schedule 3.3, at the exercise prices
------------
set forth on Schedule 3.3. and [6,963,351] shares are available for issuance
------------
pursuant to currently outstanding options and warrants granted outside of the
Company's stock option and purchase plans, each of which is described in
Schedule 3.3, and (b) 31,523,684 shares of Preferred Stock, of which 6,523,684
- -------------
shares are designated Class A Convertible Preferred Stock, par value $.01 per
share (the "Class A Preferred Stock"), of which no shares are issued and
outstanding and all of which are reserved for issuance upon the exercise of all
the warrants (collectively, the "Prior Warrants") to purchase Class A Preferred
Stock at the exercise prices set forth in Schedule 3.3. There are no treasury
------------
shares held by the Company. All outstanding shares of capital stock of the
Company have been, or upon issuance will be, validly issued, fully paid and
nonassessable. Except as disclosed in Schedule 3.3, no shares of capital stock
------------
of the Company are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company or were issued in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state, provincial or municipal securities laws. Except as set forth
in this Section 3.3 or in Schedule 3.3, as of the date of this Agreement, (i)
------------
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company is obligated to register the
sale of any of its securities under the Securities Act (except this Agreement)
and (iv) there are no outstanding securities of the Company which contain any
redemption or similar provisions, or any contracts, commitments, understandings
or arrangements by which the Company is or may become bound to redeem or
purchase a security of the Company. Except as disclosed in Schedule 3.3, there
------------
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Debenture, the Warrant or any
Conversion Shares (collectively, the "Securities"). The Company has furnished
to the Investor true and correct copies of the Company's Articles of
Incorporation and By-laws, and the terms of all securities convertible into or
exercisable for any shares of capital stock of the Company and the material
rights of the holders thereof in respect thereto. A current shareholders' list
giving the names, addresses and number of shares of capital stock of the Company
owned by each shareholder of the Company is attached hereto as part of Schedule
--------
3.3.
- ---
4
<PAGE>
3.4 AUTHORIZATION. Subject to the filing of the Articles Amendment,
which shall occur on December 29, 1997 (the "Effective Date"), the Company has
all necessary corporate power and authority to enter into and perform this
Agreement, the Debenture, the Warrant and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "Transaction Documents"), and to issue and
deliver the Securities in accordance with the terms hereof and thereof. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation of the transactions contemplated hereby and thereof,
including, without limitation, the issuance and sale of the Debenture and the
Warrant, and the issuance of the Conversion Preferred Shares (assuming the
closing of the Class B Preferred Stock Financing), the Conversion Common Shares,
the Interest Common Shares and the Warrant Common Shares (collectively, the
"Conversion Shares"), have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its shareholders except in connection with the
authorization and issuance of the Class B Preferred Stock, the terms of which
are still being negotiated in connection with the Class B Preferred Stock
Financing. The Transaction Documents have been duly executed and delivered by
the Company. Each of the Transaction Documents constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to or affecting generally the enforcement
of creditors' rights and remedies.
3.5 ISSUANCE OF SECURITIES. The Debenture and the Warrant are duly
authorized for issuance and sale to the Investor by the Company pursuant hereto
and, upon issuance in accordance with the terms hereof, shall be valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies. Upon the Effective
Date, the Conversion Common Shares will have been duly authorized and reserved
for issuance upon conversion of the Debenture and upon such issuance the
Conversion Common Shares will be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
Upon the Effective Date, the Interest Common Shares will have been duly
authorized and reserved for issuance in accordance with the terms and conditions
of this Agreement and the Debenture and, upon such issuance will be fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof. Upon the Effective Date, the Warrant Common Shares will have
been duly authorized and reserved for issuance upon exercise of the Warrants in
accordance with the terms and conditions of this Agreement and the Warrants, and
upon such issuance will be fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof. Subject to the filing, if
required, of a Form D, the issuance by the Company of the Securities is exempt
from registration under the Securities Act.
3.6 CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS. Except as
described on Schedule 3.6, the Company is not a party to or bound by any
------------
written, oral or implied contract, agreement, lease, power of attorney,
guaranty, surety arrangement, or other commitment in excess of $50,000
including, but not limited to, any contract or agreement for the
5
<PAGE>
purchase or sale of merchandise or for the rendering of services, but excluding
any purchase orders to the Company in the normal course of its business.
3.7 BREACH. The Company is not in violation or breach of any of the
terms. conditions or provisions of the Articles of Incorporation or the By-laws,
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract, agreement, lease, instrument, court order,
judgment, arbitration award or decree to which it is a party or by which it is
bound.
3.8 EMPLOYEES, OFFICERS AND DIRECTORS. A current list of the names
and addresses of all officers and directors of the Company is attached hereto as
Schedule 3.8. Except as described on Schedule 3.8, the Company has not entered
- ------------- ------------
into any employment or other agreements with any of its employees, officers or
directors, or any of its former employees, officers or directors.
3.9 COMPLIANCE WITH LAWS. Except as described in Schedule 3.9, the
-------------
Company is in compliance with all existing requirements of laws, including but
not limited to federal, state, local and foreign laws, rules and regulations,
and all existing requirements of all governmental bodies or agencies having
jurisdiction over it, the failure to comply with which might have a material
adverse effect on the Company, its assets, business or prospects.
3.10 CONFLICT WITH DOCUMENTS. Except as disclosed in Schedule 3.10 or
-------------
as explicitly provided in this Agreement, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation of
the transactions contemplated hereby and thereby (including, without limitation,
the reservation for issuance and the issuance of the Conversion Shares other
than the Conversion Preferred Shares), either immediately or with the passage of
time or the giving of notice or both, will not:
(a) conflict with or cause a material breach or an Event of
Default under any of the terms, conditions or provisions of, result in
a termination or modification of, or cause any acceleration of any
obligation of the Company under any material contract, lease or other
instrument to which the Company is bound or by which any of the
Company's properties or assets may be affected;
(b) subject to the filing of the Articles Amendment on the
Effective Date, result in a violation of the Articles of Incorporation
or the By-laws or any statute, law, rule or regulation or any order,
judgment or decree to which the Company or any of its properties or
assets are subject; or
(c) result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material
properties or assets.
[3.11 FINANCIAL STATEMENTS. The Company has furnished to the
Investor copies of its audited annual financial statements for the fiscal year
ended December 31, 1996, and its unaudited financial statements for each month
in 1997 through October and for the year of 1997
6
<PAGE>
through October 31, 1997, all of which are attached hereto as Schedule 3.11. The
-------------
audited and unaudited financial statements referred to above are correct and in
accordance with the Company's books and records, and each presents fairly, in
all material respects, the Company's financial position at the end of the period
specified and the results of its operations and financial condition for such
period, subject to normal recurring adjustments.]
3.12 TAXES. The Company has filed all applicable federal, state,
local and foreign tax returns required to be filed to date, in accordance with
the provisions of law pertaining thereto, and has paid all taxes, interest,
penalties and assessments required to have been paid to date. The Company has
not been advised that any of its returns, whether federal, state, local or
foreign, have been or are being audited as of the date hereof.
3.13 LITIGATION. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its properties or rights,
the Common Stock or any of the Company's officers or directors in their
capacities as such.
3.14 INTANGIBLE PROPERTY. Except as set forth on Schedule 3.14, the
-------------
Company has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company, all permits,
licenses and other authority, necessary to the conduct of its business as
presently constituted and conducted, and as proposed to be constituted and
conducted.
3.15 TRADEMARKS, PATENTS, ETC. The corporate names of the Company,
and the trade names, trademarks, and service marks listed on Schedule 3.15 are
-------------
the only names and marks which are used by the Company in the operation of its
business. Except as set forth on Schedule 3.15, no claim has been asserted
-------------
against the Company involving any conflict or claim of conflict of its trade
names, trademarks or service marks or with the trade names, trademarks, service
marks or corporate names of others, and, to the best of the knowledge of the
Company and except as set forth on Schedule 3.15, there is no basis for any such
-------------
claim of conflict. Except as set forth on Schedule 3.15 and to the best of the
-------------
knowledge of the Company, the Company is the sole and exclusive owner of its
trade names, trademarks and service marks and has the sole and exclusive right
to use such trade names, trademarks and service marks. The Company is the
registered owner of the United States and foreign patents listed on Schedule
--------
3.15 and has applications pending with the U.S. Patent Office and/or foreign
- ----
patent offices for the patents listed on Schedule 3.15 as being patents pending.
-------------
The Company has no knowledge of any adverse claim of any kind with respect to
any of such patents or patent applications, nor does it have any knowledge, or
reason to know, that a patent will not issue on any such patent application.
Except as set forth on Schedule 3.15 and to the best of the knowledge of the
-------------
Company, no process used by the Company or any product manufactured or sold by
the Company infringes upon any patent, patent application, trademark, trade name
or service mark of any other party. There has been no claim of infringement of
and, to the best of the knowledge of the Company and except as set forth on
Schedule 3.15, the Company is not infringing on any third party's patent,
- -------------
license, trademark, trade name, service mark, copyright or other proprietary
right.
7
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3.16 ENVIRONMENTAL LAWS. (i) The Company (x) is in compliance with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety or emissions, discharges,
releases, threatened releases, removal, remediation or abatement of pollutants,
contaminants, chemicals or industrial, hazardous or toxic substances or wastes
into or in the environment (including without limitation air, surface water,
ground water or land), or otherwise used in connection with the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous or toxic substances or wastes,
as defined under such applicable laws ("Environmental Laws"), (y) has received
all permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (z) is in compliance with all
terms and conditions of any such permit, license or approval, except to the
extent that the matters within clauses (x), (y) or (z) above would not have a
material adverse effect.
(ii) There is no substance designated a "hazardous substance" by any
Environmental Law, including asbestos, petroleum, urea formaldehyde insulation
and petroleum by-products ("Hazardous Substance") present at any of the real
property currently owned or leased by the Company, except to the extent that
such presence could not reasonably be expected to have a material adverse
effect; and with respect to such real property, to the knowledge of the Company,
there has not occurred (x) any release or any threatened release of a Hazardous
Substance or (y) any discharge or threatened discharge of any Hazardous
Substance into the ground, surface or navigable waters, which discharge or
threatened discharge violates any federal, state, local or foreign laws, rules
or regulations concerning water pollution.
(iii) The Company has not disposed of, transported, or arranged for
the transportation or disposal of any Hazardous Substance where such disposal,
transportation or arrangement would give rise to liability pursuant to any
Environmental Law other than any such liabilities that could not reasonably be
expected to have a material adverse effect.
(iv) To the knowledge of the Company, there are no underground
storage tanks, asbestos-containing materials, polychlorinated biphenyls or urea
formaldehyde insulation at any of the real property currently owned or leased by
the Company in violation of any Environmental Law.
3.17 INSURANCE. The Company maintains insurance on all of its
insurable properties as listed on Schedule 3.17 attached hereto. All such
-------------
insurance policies are in full force and effect and the Company is not in
default of any provision thereof. The Company has not received notice from the
issuer of any such insurance policies of its intention to cancel or refusal to
renew any policy issued by it.
3.18 GOVERNMENTAL CONSENT. No permit, consent, approval or
authorization of, or filing with, any governmental regulatory authority or
agency is required of the Company in connection with the execution, delivery and
performance of the Transaction Documents, or the consummation of the
transactions contemplated hereby and thereby, except as may be required by any
federal or state securities laws, with which the Company will comply.
3.19 LIABILITIES. The Company has no liabilities, whether related to
tax or non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or
8
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contingent, or otherwise, except (i) as provided in the balance sheet of the
Company as of October 31, 1997 set forth at Schedule 3.11, (ii) as set forth on
-------------
Schedule 3.19 or (iii) for liabilities of a non-material nature incurred in the
- -------------
normal course of the Company's business since that date.
3.20 ASSETS. The Company has good and marketable title to all of its
assets free and clear of all liens, charges, claims, encumbrances and defects of
any kind or character, except as set forth on Schedule 3.20 (collectively,
-------------
"Permitted Liens"). To the best of the knowledge of the Company, all equipment,
furniture and fixtures, and other tangible personal property of the Company are
in good operating condition and repair and do not currently require any repairs
other than normal routine maintenance to maintain such property in good
operating condition and repair.
3.21 CONFLICTING INTERESTS. Except as set forth on Schedule 3.21, no
-------------
director, officer, or any relative or affiliate of any director or officer, or,
to the best of the knowledge of the Company, any employee or shareholder of the
Company or any relative or affiliate of any of the employees or shareholders (a)
has any pecuniary interest in any supplier or customer of the Company or in any
other business enterprise with which the Company conducts business or with which
the Company is in competition; or (b) is indebted to the Company for money
borrowed.
3.22 NO PAYMENTS TO SHAREHOLDERS OR OTHERS. Except as set forth on
Schedule 3.22, there has not been any purchase or redemption of any shares of
- -------------
stock of the Company by the Company or any transfer, distribution or payment by
it, directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payments made in the ordinary
course of business for goods and services in arm's length transactions, and (ii)
wages paid to non-executive employees. The salaries and benefits payable to the
officers of the Company have not been increased since May 31, 1997.
3.23 ABSENCE OF MATERIAL CHANGES. Except as set forth in Schedule
--------
3.23 attached hereto, since December 31, 1996:
- ----
(a) there has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or
affairs of the Company or any material physical damage or loss to any
of its properties or assets or to the premises occupied by it (whether
or not such damage or loss is covered by insurance);
(b) the Company has not taken any action outside of the ordinary
and usual course of its business, except as related to the
transactions contemplated hereby;
(c) the Company has not borrowed any money or become
contingently liable for any obligation or liability of others;
(d) the Company has paid all of its debts and obligations as
they become due ;
9
<PAGE>
(e) except for the Debenture to be issued hereunder, the Company
has not incurred any debt, liability or obligation of any nature to
any party, except for obligations arising from the purchase of goods
or the rendition of services in the ordinary course of business;
(f) the Company has not knowingly waived any right of
substantial value;
(g) the Company has maintained its books, accounts and records
in the usual, customary and ordinary manner; and
(h) the Company has used its best efforts to preserve its
business organization intact, to keep available the services of its
employees, and to preserve its relationships with its customers,
suppliers and others with whom it deals.
3.24 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. No provisions in
the Transaction Documents relating to the Company or any other document,
schedule, exhibit or other information furnished by the Company to the Investor
in connection with the execution, delivery and performance of the Transaction
Documents, or the consummation of the transactions contemplated hereby and
thereby, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated in order to
make the statement, in light of the circumstances in which it is made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR AND RESTRICTIONS ON
TRANSFER.
4.1 REPRESENTATIONS AND WARRANTIES BY THE INVESTORS. Each Investor
represents and warrants to the Company as follows:
(a) The Investor (i) is acquiring the Debenture and the Warrant
and (ii) upon conversion of the Debenture or the Class B Preferred
Stock, or upon exercise of the Warrant, will acquire the applicable
Conversion Shares then issuable, for investment for its own accounts
and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands that the
Securities have not been registered under the Securities Act, or under
any state securities or "Blue Sky" laws, and, as a result, are subject
to substantial restrictions on transfer. The Investor acknowledges
that the Securities must be held indefinitely unless subsequently
registered under the Securities Act and any applicable state
securities or "Blue Sky" laws, or exemptions from registration under
the Securities Act and such laws are available; provided, however,
that by making the representations herein, the Investor does not agree
to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an
exemption from registration under the Securities Act and any
applicable state securities or "Blue Sky" laws.
10
<PAGE>
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors rights and
to general equity principles.
(c) The Investor is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D under the Securities Act.
(d) [STATE REPRESENTATION]
4.2 LEGENDS. The Investor understands that the certificates or other
instruments representing the Debenture and the Warrant and, until such time as
the sale of the Conversion Shares have been registered under the Securities Act,
the stock certificates representing the Conversion Shares, except as set forth
below, shall bear a restrictive legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND SUCH LAWS.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the Securities Act, (ii) in connection
with a sale transaction, such holder provides the Company with an opinion of
counsel, in a form reasonably acceptable to the Company's counsel, to the effect
that a public sale, assignment or transfer of such Securities may be made
without registration under the Securities Act, or (iii) such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company's counsel, that such Securities can be sold pursuant to Rule 144(k)
promulgated under the Securities Act (or a successor rule thereto) ("Rule 144").
The Investor acknowledges, covenants and agrees to sell the Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement effective under the Securities Act, or
(ii) advice of counsel that such sale is exempt from registration required by
Section 5 of the Securities Act.
5. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in Sections 3.3, 3.4 and 3.5 hereof
shall survive the consummation of the transactions provided for in the
Transaction Documents and shall not terminate. All other representations and
warranties contained herein shall survive the consummation of the transactions
provided for in the Transaction Documents for a period beginning on the date
hereof up to and including the earlier of the conversion of all Class B
Preferred Stock held by the Investor into Common Stock or December 31, 1999;
provided, however, that such period shall not end prior to December 31, 1998.
No such representation or
11
<PAGE>
warranty shall be deemed to have been waived, affected or impaired by any
investigation made by any person or persons.
6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants to
comply with the following affirmative covenants, unless waived by the Investor
(or Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed
to have also waived such covenant), as long as the Debenture remains
outstanding; provided, however, that in the event the Debenture is converted
into shares of Class B Preferred Stock, the Company shall provide to the
Investor all such information and rights as the Company provides to any other
holder of Class B Preferred Stock, whether pursuant to the Company's Articles of
Incorporation, as amended, contract or otherwise; and provided, further, that
the Company shall comply with Section 6.2, unless waived by the Investor (or
Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed to
have also waived such covenant), until the earlier of (i) such time as the
Investor owns no Debentures, no Warrants, no Class B Preferred Stock and fewer
than 100,000 shares of Common Stock or (ii) the closing of an underwritten
initial public offering of any of the Company's securities under the Securities
Act (or any successor statute), yielding gross proceeds to the Company of at
least $7,500,000.
6.1 FINANCIAL STATEMENTS. The Company shall furnish to the Investor
the following financial statements, reports and other documents, such financial
statements to be prepared in accordance with generally accepted accounting
principles consistently applied, certified by the Company's chief executive or
financial officer:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of the Company, a balance sheet of the
Company as of the end of such fiscal year and related statements of
operations, shareholders' equity and cash flows for such fiscal year,
all in reasonable detail and setting forth in comparative form the
figures as of the end of and for the previous fiscal year, which
financial statements shall have been audited, and shall be accompanied
by an unqualified opinion addressed to the Company from "Big Six"
independent auditors or other independent auditors that are reasonably
satisfactory to the Investor, together with a copy of such auditors'
letter to Company's management;
(b) as soon as available, and in any event within 20 days after
the end of each month for such month and for the year to date, an
unaudited balance sheet and unaudited statements of operations,
shareholders' equity and cash flows, together with a comparison of
such financial statements with the budget of the Company for such
period; and
(c) as soon as available, and in any event at least 60 days prior
to the end of each fiscal year of the Company, an annual budget and
business plan for the subsequent fiscal year, which budget and
business plan shall include a monthly breakdown of financial
statements, which breakdown shall include the underlying assumptions
and a brief qualitative description of the Company's plan by the
Company's Chief Executive Officer in support of such budget and
business plan, which also
12
<PAGE>
shall have been approved and accepted by the Board of Directors of the
Company. If during the course of operations for any such month it
becomes apparent that deviations from such financial statements,
budget and business plan have occurred, the Company shall submit to
its Board of Directors a statement of such deviation within five
business days from the date of the Company's knowledge of such
deviation (the "Statement"). The Statement shall detail the manner in
which a new financial projection deviates from the annual business
plan and the reason therefor. The Board of Directors shall have the
right to ask questions or request any other reasonable additional
information with respect to the Statement. Any and all subsequent
deviations from such financial statements shall be resubmitted to the
Board of Directors of the Company for approval and acceptance or for
required further revision until such approval and acceptance is
obtained.
In the event that the Company at any time hereafter is required, by law or by
generally accepted accounting principles, to consolidate its financial
statements with those of a subsidiary corporation, the Company shall thereafter
finish the financial statements required by this Section 6.1 on a consolidated
basis, and the monthly and annual financial statements specified above shall be
furnished with consolidating financial statements.
6.2 ADDITIONAL INFORMATION.
(a) The Company shall, as promptly as possible (but, in any event
within ten days) after obtaining knowledge of the occurrence of any
"Default" (as such term is defined in Section 2.1(c) above), or any
other material adverse development or event, furnish the Investor with
a detailed written notice of such default or event and the proposed
response of Company management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the
Investor with notice of all material actions, suits and proceedings
before any court or governmental agency, commission, board, bureau,
department or instrumentality, domestic or foreign, affecting the
Company.
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or
directors of the Company, and all written consents taken by the
shareholders and/or directors of the Company.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the
same, furnish the Investor with all reports and financial statements
that the Company shall send or make available to the shareholders or
the directors of the Company or the Securities and Exchange
Commission.
13
<PAGE>
(e) The Company shall promptly furnish the Investor with copies
of all material contracts, indentures, instruments and agreements the
Company provides to any investor in the Class B Preferred Stock
Financing or in any other additional bridge financing, when such
documents are provided to such investor.
(f) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the
condition of operations, financial or otherwise, of the Company as the
Investor may, from time to time, reasonably request.
(g) The Investor agrees not to disclose to third parties any
information concerning the Company which is furnished to the Investor
by the Company and designated as confidential, except as required by
law, legal process or its fiduciary duty to report financial and
business information to its partners, shareholders, directors or
affiliates and to such other persons as the Investor, in the exercise
of its prudent business judgment, may select and shall use reasonable
commercial efforts to have such persons maintain such confidentiality
of the confidential information. The term "confidential information"
does not include information which (i) was or becomes generally
available to the public other than as a result of a disclosure by the
Investor, or (ii) was or becomes available to the Investor on a
nonconfidential basis from a source other than the Company, provided
that such source is not bound by a confidentiality agreement with the
Company.
6.3 INSPECTION. The Company shall permit, at any reasonable time and
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION AND BY-LAWS. The
Company shall perform and observe all the obligations and provisions set forth
in the Articles of Incorporation and the By-laws.
6.5 MAINTAIN RIGHTS AND FACILITIES. The Company shall maintain and
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
6.6 BOOKS AND RECORDS. The Company shall make and keep books,
records and accounts, which, in reasonable detail accurately and fairly reflect
its transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable
14
<PAGE>
assurances that: (a) transactions are executed in accordance with management's
general or specific authorization; (b) transactions are recorded as necessary to
permit preparation of the financial statements required herein and to maintain
accountability for assets; and (c) access to assets is permitted only in
accordance with management's general or specific instructions and recorded
assets are compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any difference.
6.7 OTHER INSURANCE. The Company shall maintain insurance against
such risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.8 CONTRACTS AND AGREEMENTS. The Company shall comply in all
material respects with the provisions of all material contracts, indentures,
instruments and agreements to which it is a party or by which the Company or its
properties are bound, and with all other material obligations which the Company
incurs or to which it becomes subject.
6.9 TAXES. The Company shall pay and discharge when due all federal,
state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
however, that the Company may in good faith contest any tax, assessment,
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.10 COMPLIANCE WITH LAWS. The Company shall comply with all laws,
rules and regulations of all governmental authorities and agencies applicable to
the Company, its business or its properties, the failure to comply with which
might have a material adverse effect on the Company.
7. NEGATIVE COVENANTS. The Company hereby covenants that as long as the
Debenture remains outstanding the Company shall comply with the following
negative covenants unless such covenant is waived by the Investor; provided,
however, that a waiver of any covenant or the approval of any action hereunder
by Atlantic Coastal Ventures, L.P. ("Atlantic") shall be deemed to constitute a
waiver of such covenant or approval of such action by the Investor.
7.1 CONDUCT OF BUSINESS. The Company shall not:
(a) (i) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other
corporation or other entity or entities; (ii) reorganize,
dissolve or liquidate the Company, or adopt any plan of
reorganization, dissolution or liquidation of the Company; (iii)
sell, assign or otherwise dispose of all or any substantial
portion of its assets; or (iv) acquire all or any substantial
portion of the voting stock or assets of another corporation or
other entity or entities; provided, however, the Company may
complete its proposed acquisition of VIONA Development Hard- &
Software Engineering, GmbH, with the
15
<PAGE>
cash portion of the purchase price not to exceed $2,500,000
(excluding any applicable taxes that the Company has agreed to
assume);
(b) except as otherwise required, permitted or acknowledged
by this Agreement or any Schedule hereto, create, authorize or
issue any additional shares of capital stock or any rights to
acquire any shares of capital stock or any other security, or
repurchase any shares of its capital stock except from employees
upon termination of employment;
(c) incur, create, assume or guarantee any indebtedness
which ranks senior or pari passu in the right of payment to the
Debenture, other than additional pari passu bridge financing of
up to $750,000 on the same terms and considerations contemplated
hereby, which the Company may obtain following the execution of
this Agreement;
(d) except as contemplated by this Agreement, amend the
Articles of Incorporation or the By-laws; or
(e) effect any material change in the nature of the business
of the Company, or apply the assets of the Company other than for
the conduct of the business of the Company, as such business is
conducted and proposed to be conducted.
7.2 LIENS AND ENCUMBRANCES. Except for Permitted Liens (as defined
in Section 3.20), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent.
7.3 DIVIDENDS. The Company shall not declare or pay any dividend
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than as required, permitted
or acknowledged by this Agreement or the Articles of Incorporation.
7.4 AGREEMENTS. The Company shall not enter into any contract,
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Debenture, or
which otherwise restricts, in any material respect, the Company's ability to
perform under the Transaction Documents.
7.5 INSIDER TRANSACTIONS. Except as disclosed in Schedules 3.21 and
--------------
3.22, the Company shall not enter into any transaction with any of its officers,
- ----
directors or shareholders, unless such transaction is an arm's-length
transaction on fair and reasonable terms, and shall not increase in any way the
compensation payable, directly or indirectly, to any of the Company's officers.
7.6 CAPITAL EXPENDITURES. The Company shall not incur, in any
twelve-month period, capital expenditures (including expenditures for
capitalized leases) in excess of
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<PAGE>
$150,000 or any single capital expenditure in excess of $60,000, unless such
expenditures were explicitly included in an approved budget of the Company.
Notwithstanding the foregoing, the Company shall obtain the prior written
approval of the Investor with respect to any expenditure submitted to NEPA
Venture Fund II, L.P. ("NEPA II") for its approval.
7.7 PAYMENTS, NO DEFAULT. The Company shall make all required
payments of rent, taxes, debts and other material obligations of the Company
promptly when due. The Company shall not be in default with respect to any
material contracts, agreements or instruments to which the Company is a party or
by which the Company is bound.
7.8 MATERIAL CONTRACTS. The Company shall not, during any fiscal
year of the Company, enter into material contracts, other than in the ordinary
course of business, pursuant to which the Company would incur liabilities in
excess of $50,000 individually or $100,000 in the aggregate, unless the Board of
Directors of the Company has previously approved the execution of such contracts
or such contracts were explicitly included in an approved budget of the Company.
Notwithstanding the foregoing, the Company shall obtain the prior written
approval of the Investor with respect to any material contracts submitted to
NEPA II for its approval.
8. REGISTRATION AND RELATED RIGHTS.
8.1 PIGGYBACK REGISTRATION.
(a) As used in this Section 8, "Registration Stock" shall
mean any Securities or any other shares of Common Stock, Class B
Preferred Stock or other securities received by holders of the
Securities upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event;
provided, however, that Registration Stock shall not include any
Securities or such other securities disposed of pursuant to one
or more registration statements under the Securities Act, or
which have been sold pursuant to Rule 144 (as previously defined)
or which have otherwise been sold without registration under the
Securities Act. For purposes of this Section 8, any record holder
of securities convertible into Registration Stock (or exercisable
for or payable in Registration Stock) shall be deemed to be the
holder of the Registration Stock issuable upon such conversion
and/or exercise and/or payment.
(b) If the Company should seek to register under the
Securities Act or qualify any of the securities holdings of the
Company or any of its shareholders (except in connection with any
stock option plan, stock purchase plan, savings or similar plan
or an acquisition, merger or exchange of stock, to be registered
on Forms S-4, S-8 or any successor forms under the Securities
Act) and if the form of registration statement proposed to be
used otherwise may be used for the registration of the
Registration Stock, then, on each such occasion, the Company
shall furnish the Investor with at least 30 days prior written
notice thereof. At the written request of the Investor, given
within 20 days after the receipt of
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<PAGE>
such notice, the Company will use its best efforts to cause all
of the Registration Stock for which registration shall have been
requested by the Investor to be included in such registration
statement. In the event that the proposed registration by the
Company is, in whole or in part, an underwritten public offering
of securities of the Company, and the managing underwriter
determines and advises in writing that the inclusion of all
Registration Stock proposed to be included in the underwritten
public offering and other issued and outstanding shares of Common
Stock proposed to be included therein by persons other than (i)
holders of Registration Stock or (ii) holders of Subordinate
Shares (as defined in Section 8.4) with rights equal to those of
the holders of Registration Stock ("Other Registration Stock")
(such other shares which are not Registration Stock or Other
Registration Stock being the "Other Shares") would interfere with
the successful marketing (including pricing) of the securities,
then the number of shares of Registration Stock, Other
Registration Stock and Other Shares to be included in such
underwritten public offering shall be reduced first, pro rata
among the holders of Other Shares; second, if necessary, pro rata
among the holders of Registration Stock and Other Registration
Stock combined, based on the number of shares requested by
holders thereof to be registered in such underwritten public
offering; and lastly, if necessary, among the Company's shares
requested by the Company to be registered; provided, however,
that the holders of Registration Stock do not then elect to
exercise their rights under Section 8.2; and, further provided,
that in no event, without the consent of the holders of at least
67% of the Registration Stock, shall the percentage of the
Registration Stock that is included in such registration
statement be less than the percentage of the securities of any
other shareholder included therein. In the event that the Company
offers any of its securities in an offering exempt from
registration under the Securities Act pursuant to Regulation A,
the Company will provide to the holders of Registration Stock
rights comparable to those provided herein.
8.2 DEMAND REGISTRATION.
(a) After the closing of an underwritten offering of the
Common Stock, if at any time the Company is requested in writing
by the holders of not less than 67% of the Registration Stock to
effect the registration under the Securities Act of at least 33
1/3% of the Registration Stock, the Company shall promptly give
written notice of such proposed registration to all record
holders of Registration Stock. Such holders shall have the right,
by giving written notice to the Company within 30 days from
receipt of the Company's notice, to elect to have included in
such registration such of their Registration Stock as such
holders may request in such notice of election. Thereupon, the
Company shall, as expeditiously as possible, use its best efforts
to effect the registration, on a form of general use under the
Securities Act, of all shares of Registration Stock which the
Company has been requested to register; provided, however,
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<PAGE>
that if the holders of not less than 67% of the Registration
Stock shall so request (and at least 50% of the Registration
Stock is being registered), the Company shall file such
registration statement pursuant to Rule 415 or any successor rule
or regulation under the Securities Act, so as to permit the
continuous or delayed offering of the Registration Stock in
accordance with the intended method of disposition specified in
the notice of the exercise of rights under this Section 8.2(a),
to the extent such offering qualifies under such rule or
regulation, but in no event shall the Company be required to
maintain the effectiveness of such registration statement beyond
a two year period. The Company shall be obligated to cause to
become effective one registration statement pursuant to which
Registration Stock is sold under this Section 8.2(a).
(b) In addition and not in limitation of the rights set
forth in Sections 8.1(b) and 8.2(a), at such time as the Company
shall have qualified for the use of a short form Form S-3 in an
offering solely for the accounts of persons other than the
Company (or any similar form or forms promulgated by the
Securities and Exchange Commission), the holders of not less than
67% of the Registration Stock shall have the right to request an
unlimited number of registrations on Form S-3 or other similar
forms. Holders shall have the right, by giving written notice to
the Company within 20 days from receipt of notice from the
Company of such request, to elect to have included in such
registration such of their Registration Stock as such holders may
request in such notice of election. Thereupon, the Company shall,
as expeditiously as possible, use its best efforts to effect the
registration, on Form S-3 of all shares of Registration Stock
which the Company has been requested to register. The Company
shall not be required to effect any such registration more than
once every twelve months. Registrations effected on Form S-3
shall not be considered to be demand registrations pursuant to
Section 8.2(a) hereof.
(c) The Company may include in a registration requested
under this Section 8.2 any additional authorized shares of the
Common Stock of the Company, whether or not issued, for sale by
the Company or for sale by others; provided, however, that such
shares shall not be included to the extent that the holders of a
majority of the shares of Registration Stock included therein
determine in good faith that the inclusion of such shares will
interfere with the successful marketing of the shares of
Registration Stock to be included therein; and, provided,
further, that, upon the election of the holders of a majority of
the shares of Registration Stock included therein, or if the
number of shares to be so included equals or exceeds the number
of shares of Registration Stock included therein by the holders
of Registration Stock, such registration shall be deemed to be a
registration pursuant to Section 8.1(b) hereof.
19
<PAGE>
(d) The underwriter and the terms of the underwriting for
any registration pursuant to this Section 8.2 shall be mutually
acceptable to the Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to
the contrary:
(i) The Company reserves the right to delay any such
registration pursuant to Section 8 for a period of not more
than sixty days, or to withhold efforts to cause such
registration statement to become effective for a period of
not more than sixty days, if the Board of Directors of the
Company determines in good faith that such registration
might (A) interfere with or affect the negotiation or
completion of any material transaction that is being
contemplated by the Company, or (B) involve initial or
continuing disclosure obligations materially adverse to the
best interests of the Company's shareholders. If, after a
registration statement becomes effective, the Company
advises the holders of the Registration Stock covered by
such registration statement that the Company considers it
appropriate for the registration statement to be amended,
the holders of such shares shall suspend any further sales
of their registered shares until the Company advises them
that the registration statement has been amended. The time
periods referred to in this Section 8 shall be extended for
an additional number of business days during which the
rights to sell shares was suspended.
(ii) The Company shall not be obligated to file a
registration statement pursuant to Section 8.2 within three
months after the effective date of any registration under
which piggyback rights were granted pursuant to Section 8.1.
8.3 FURTHER OBLIGATIONS OF THE COMPANY. Whenever the Company is
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to:
(a) prepare for filing and file with the Securities and
Exchange Commission promptly thereafter a registration statement
and such amendments and supplements to said registration
statement and the prospectus used in connection therewith as may
be necessary to keep said registration statement effective and to
comply with the provisions of the Securities Act with respect to
the sale of securities covered by said registration statement for
the period necessary (but, other than as otherwise provided in
Section 8.2(a), in no event more than nine months) to complete
the proposed public offering;
20
<PAGE>
(b) furnish to each selling holder so requesting such copies
of preliminary and final prospectus and such other documents as
said holder may reasonably request to facilitate the public
offering of such holder's Registration Stock;
(c) use its best efforts to register or qualify the
Registration Stock covered by said registration statement under
the securities or "Blue Sky" laws of such jurisdictions as the
holders of Registration Stock may reasonably request, to keep
such registration or qualification in effect for so long as such
registration statement remains in effect, and do any and all
other acts and things that may be reasonably necessary or
advisable to enable such seller to consummate the disposition in
such jurisdictions of its Registration Stock covered by such
registration statement, except that the Company shall not for any
such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not, but
for the requirements of this subdivision (c), be obligated to be
so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any
such jurisdiction;
(d) furnish to the selling holders, and any underwriters or
broker-dealers through whom the Registration Stock may be sold,
an opinion or opinions of counsel for the Company and a "cold
comfort" letter or letters of the independent auditors for the
Company, in form and substance customary for similar offerings;
(e) permit each selling holder or the selling holder's
counsel or other representatives, at the selling holder's
expense, to inspect and copy such corporate documents and records
as may reasonably be requested by them;
(f) if so requested, furnish to each selling holder a copy
of all documents filed and all correspondence to or from the
Securities and Exchange Commission in connection with any such
offering;
(g) immediately notify each seller of Registration Stock
covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing, and at the request of any such seller or holder,
prepare and furnish to such seller and holder a reasonable number
of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the
purchasers of such Registration
21
<PAGE>
Stock, such prospectus shall not include 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 not
misleading in the light of the circumstances then existing;
(h) otherwise use its best efforts to comply with all
applicable rules and regulations of the Securities and Exchange
Commission, and make available to its security holders, as soon
as reasonably practicable, an earnings statement covering a
period of at least twelve months, but not more than eighteen
months, beginning with the first month of the first fiscal
quarter after the effective date of such registration statement,
which earnings statement shall satisfy the provisions of Section
13(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); and
(i) provide and cause to be maintained a transfer agent and
registrar for all registrable securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement.
If requested by the Company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Securities and Exchange Commission in connection therewith.
8.4 REGISTRATION RIGHTS EQUAL OR SUPERIOR. The Company shall not
grant any registration rights or register any securities for the account of any
person other than holders of Registration Stock unless permitted to do so by the
written consent of the holders of not less than 67% of the Registration Stock
(such securities being the "Subordinate Shares").
8.5 EXPENSES, ETC. All expenses in connection with the preparation
and filing of any registration statement under this Section 8, any registration
or qualification under the securities or "Blue Sky" laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with "Blue Sky" or state securities
laws, (iii) other fees or expenses expressly applicable to securities being sold
by the selling shareholder, and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 INDEMNIFICATION. The Company shall indemnify the selling holders
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue
22
<PAGE>
statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock was registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto (unless cured by an amendment or supplement
to the prospectus delivered to the selling holders prior to the sales of the
Registration Stock that is subject to the claimed right of indemnification), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registration Stock
that is subject to the claimed right of indemnification); and will reimburse the
selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such selling holders in connection with
investigating or defending against such loss, claim, damage, liability or
action; except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such selling holders expressly for use
therein. In connection with any such registration statement, the selling
holders of Registration Stock will furnish the company in writing such
information as may reasonably be requested by the Company for use in any such
registration statement or prospectus and will indemnify the Company, its
directors and officers, and, to the extent required in any agreement with any
underwriter or broker-dealer, each such underwriter or broker-dealer and each
person, if any, who controls the Company or any underwriter or broker-dealer
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities, expenses and actions in respect thereof (under the Securities Act
or common law or otherwise) caused by any untrue statement or alleged untrue
statement of a material fact required to be stated in such registration
statement or prospectus and necessary to make the statements therein not
misleading; and will reimburse the Company for any legal or other out-of-pocket
expenses reasonably incurred by it in connection with investigating or defending
against such loss, claim, damage, liability or action; but only to the extent
that such untrue statement or omission was contained in information so furnished
in writing by the selling holders of Registration Stock expressly for use
therein, and only to the extent of proceeds received by the selling holders of
Registration Stock in the offering. The Company further agrees and the selling
shareholders shall agree that, in connection with any underwritten public
offering, the Company also will enter into customary contribution arrangements
with the selling holders of Registration Stock and the underwriters or broker-
dealers through whom the Registration Stock may be sold, with respect to
situations in which indemnification is potentially unavailable.
8.7 WITHDRAWAL. If a public offering is not completed within nine
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1(b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company reserves the right, at its option, to
withdraw from registration any securities offered by the Company which have not
been sold during such period, provided that no securities offered by any holder
of Registration Stock shall be withdrawn without the consent of the holders of
50% of the Registration Stock.
8.8 EXCHANGE ACT. As promptly as possible following receipt of a
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock
23
<PAGE>
under Section 12 of the Exchange Act, arrange for its Common Stock to be listed
on a national stock exchange or included for quotation on the Nasdaq National
Market, as requested, and shall keep effective such registration and maintain
such listing or inclusion, and shall use its best efforts timely to file such
information, documents and reports as the Securities and Exchange Commission may
require or prescribe that the Company file in connection therewith. The Company
will, at the request of any holder of Registration Stock, advise such holder in
writing as to whether all reports required to be filed by the Company under
Section 13 of the Exchange Act during the 12 months preceding such request (or
for such shorter period as the Company was required to file such reports) have
been filed, and any other information which the holder may reasonably require in
order to comply with Rule 144, or any other comparable rule, as then in effect.
9. EVENTS OF DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:
9.1 DEFAULT ON PAYMENTS TO THE INVESTOR. The failure of the Company
to make (a) any principal or interest payment on the Debenture when due, or (b)
any other payment upon any other written obligation of the Company to the
Investor within 15 days after written notice from the Investor to the Company;
regardless of whether any such failure to make the payments described in (a) and
(b) above is due to a legal inability or the incapacity of the Company to make
any such payments.
9.2 INFORMATION, REPRESENTATIONS AND WARRANTIES. Any information
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
9.3 COVENANTS AND AGREEMENTS. The failure of the Company to observe,
perform or abide by any other covenant, warranty, agreement or provision in any
of the Transaction Documents, which failure is not cured to the Investor's
reasonable satisfaction within 30 days after written notice from the Investor to
the Company of its occurrence; provided, however, that no Event of Default shall
be considered to have occurred if the failure is not the failure to pay money
and is of such a nature that it reasonably cannot be cured within the Cure
Period, but if it is curable and the Company in good faith begins efforts to
cure it within the Cure Period and continues diligently to do so, the Company
shall have an additional 30 days from the date on which the Cure Period ends to
effect the cure. If the failure continues after the expiration of such
additional 30 day period, regardless of whether such failure might be curable at
some time beyond such additional 30 day period, such failure shall nevertheless
be considered an Event of Default.
9.4 DEFAULT ON OTHER OBLIGATIONS. The occurrence of a material
default following the expiration of any applicable cure period, if any, in any
material obligation of the Company or any violation of law or refusal of
regulatory permission which has a material adverse effect on the Company's
operations.
24
<PAGE>
9.5 CERTAIN EVENTS AS TO THE COMPANY. The Company shall (A) admit in
writing its inability to pay its debts generally as they become due; (B) file a
petition or answer or consent seeking relief under the Federal Bankruptcy Code,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy or insolvency law or other similar law, not discharged or
vacated or set aside or stayed within 45 days; (C) consent to the institution of
proceedings under any law referenced in (B) above, not discharged or vacated or
set aside or stayed within 45 days, or to the filing of any such petition, not
discharged or vacated or set aside or stayed within 45 days or to the
appointment or taking possession of a receiver, liquidator, assignee, trustee,
custodian (or other similar official) of the Company or any subsidiary or of any
substantial part of their property; (D) fail generally to pay its debts as such
debts become due, or take corporate action in furtherance of any such action;
(E) make an assignment for the benefit of its creditors; or (F) fail to meet any
of its material monetary obligations; provided, however, that no Event of
Default shall be considered to have occurred under subsection 9.5(F) if the
failure to meet such material monetary obligations is due to a good faith
dispute between such parties, which dispute shall continue for no more than 30
days; provided; further, that upon the expiration of such 30 day period, the
Company shall have, upon notice to the Investor an additional 30 day period to
resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time beyond such additional 30 day period, such failure under subsection
9.5(F) shall nevertheless be considered an Event of Default.
10. RIGHTS OF INVESTOR UPON DEFAULT.
10.1 RIGHTS ON DEFAULT. If there shall occur and be continuing an
Event of Default as defined in the foregoing Section 9, as long as the Debenture
is outstanding, the Investor may, by written notice to the Company, declare the
Company to be in default hereunder, whereupon, if the Investor so specifies in
such notice, the Debenture and all other indebtedness of the Company to the
Investor now or hereafter incurred, shall become immediately due and payable
without further demand, presentation or notice of any kind.
10.2 ADDITIONAL RIGHTS. The Investor shall have such additional
rights and remedies as are contained herein, in the Debenture, the Warrant, the
Class B Preferred Stock, or in any other documents and agreements delivered or
given in connection herewith, and all rights which it might have at law or
equity, all of which rights and remedies shall be cumulative.
11. LOCK-UP AGREEMENT. In the event that the Company determines to effect
an underwritten initial public offering, the Investor agrees that, for a period
of 180 days following the effective date of any registration filed in connection
therewith, the Investor will not directly or indirectly sell, transfer or
otherwise dispose of, any shares of Class B Preferred Stock, any shares of
Common Stock, or any right to acquire shares of Common Stock owned by the
Investor without the prior written consent of the underwriter(s) of such initial
public offering.
12. FURTHER ASSURANCE. The Company and the Investor agree to execute and
deliver all such other instruments and take all such other actions as any party
may reasonably request from time to time after the date hereof and without
payment of further consideration, in order to effectuate the transactions
provided for herein. The parties shall cooperate fully with each other
25
<PAGE>
and with their respective counsel and accountants in connection with any steps
required to be taken as part of their respective obligations under this
Agreement.
13. MISCELLANEOUS.
13.1 WAIVERS AND AMENDMENTS. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
13.2 GOVERNING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
13.4 ENTIRE AGREEMENT. This Agreement and the other documents
delivered in connection with the transactions contemplated hereby or thereby
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and supersedes all prior
agreements, understandings, inducements or conditions, express or implied, oral
or written, except as herein or therein contained. The express terms hereof
control and supersede any course of performance and/or usage of trade
inconsistent with any of the terms hereof.
13.5 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly made and received when personally served, or when
mailed by first class mail or overnight, by courier service such as Federal
Express, postage prepaid, or telecopied with answer back receipt and hard copy
sent in the manner set forth above, addressed as set forth below:
(i) If to the Company, then to:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, PA 19355
Telecopier No.: (610) 695-2592
Attn: President
with a copy, given in the manner prescribed above, to:
Cozen and O'Connor
The Atrium
26
<PAGE>
1900 Market Street
Philadelphia, PA 19103
Telecopier No.: (215) 665-2013
Attn: Michael J. Heller, Esq.
(ii) If to the Investors, then to the address set forth on
the signature page of this Agreement.
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
13.6 PAYMENT OF EXPENSES. All reasonable legal fees and expenses
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof, not to exceed the aggregate amount
of $5,000, shall be paid by the Company from time to time promptly upon
submission of an invoice therefore.
13.7 BROKERS. Each party represents that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement (other than Lehman Brothers Inc. ("Lehman Brothers")) and neither
party is under any obligation to pay any finder's or broker's fee in connection
herewith (other than 9% of the Purchase Price payable by the Company to Lehman
Brothers). Each party will indemnify, defend and hold the other party harmless
from any claim based on breach of this representation.
13.8 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing, and that all remedies, either
under this Agreement or by law or otherwise, shall be cumulative and not
alternative.
13.9 TITLES. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
13.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
13.11 EXECUTION; COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof,
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<PAGE>
individually or taken together, shall bear the signatures of all of the parties
reflected hereon as the signatories.
13.12 EXHIBITS; SCHEDULES. All Exhibits and Schedules attached
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
QUADRANT INTERNATIONAL, INC.
By: /s/ Gregg W. Garnick
-----------------------------------------
Name: Gregg W. Garnick
Title: Chief Executive Officer
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<PAGE>
SIGNATURE PAGE
PURCHASER:
Name: JANET MACOMBER WILLIAMSON
Signature: /s/ Janet Macomber Williamson
------------------------------
Name:
Title:
Address: 2134 SW Edgewood Rd.
------------------------------
Portland, Oregon 97201
------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
- ------------------------------------------
- ------------------------------------------
- ------------------------------------------
AGGREGATE SUBSCRIPTION AMOUNT:
Amount of Debenture: $50,000
Number of Warrants: 10,843
Aggregate Purchase Price: $50,000
DATE: April 6, 1998
<PAGE>
SIGNATURE PAGE
PURCHASER:
Name: ELIZABETH MACOMBER
Signature: /s/ Elizabeth Macomber
----------------------------
Name:
Title:
Address: 4502 2nd Ave. NW.
----------------------------
Seattle, WA
----------------------------
98107
----------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
- --------------------------------------
- --------------------------------------
- --------------------------------------
AGGREGATE SUBSCRIPTION AMOUNT:
Amount of Debenture: $50,000
Number of Warrants: 10,843
Aggregate Purchase Price: $50,000
DATE: 4-9-98
<PAGE>
SIGNATURE PAGE
PURCHASER:
Name: WILLIAM B. MACOMBER II
Signature: /s/ William Butts Macomber
-----------------------------------
Name: William Butts Macomber
Title:
Address: 2806 N St. NW
-----------------------------------
Washington, DC
-----------------------------------
20007
-----------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
AGGREGATE SUBSCRIPTION AMOUNT:
Amount of Debenture: $75,000
Number of Warrants: 16,265
Aggregate Purchase Price: $75,000
DATE: 4/13/98
<PAGE>
SIGNATURE PAGE
PURCHASER:
Name: JOHN AKERS
Signature: /s/ John Akers
----------------------------------
Name:
Title:
Address: 1 Storges Hwy
----------------------------------
Westport, CT 06880
----------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
AGGREGATE SUBSCRIPTION AMOUNT:
Amount of Debenture: $125,000
Number of Warrants: 27,108
<PAGE>
EXHIBIT 4.12
This Convertible Debenture and Warrant Purchaser Agreement (the
"Agreement"), dated March 31, 1998, by and between QUADRANT INTERNATIONAL INC.,
a Pennsylvania corporation (the "Company"), and each of the purchasers who are
signatories on the execution pages hereto (individually, an "Investor" and
collectively, the "Investors").
W I T N E S S E T H
-------------------
WHEREAS, the Company is currently negotiating the sale of preferred stock
to one or more investors for an aggregate purchase price of at least $10,000,000
(the "Class B Preferred Stock Financing"), such stock to be designated as Class
B Convertible Preferred Stock of the Company (the "Class B Preferred Stock"),
the preferences, limitations and rights of which are currently being negotiated
but shall provide that the stock be convertible at the option of its holders,
from time to time and at any time, into fully paid, validly issued and
nonassessable shares of the common stock of the Company, par value $.01 per
share (the "Common Stock"), on a share for share basis; and
WHEREAS, the Company desires financing in the aggregate amount of
$3,000,000 (the "Bridge Financing") of which $2,00,000 will be used to provide
an irrevocable letter of credit for the benefit of Solectron Texas, L.P. and
Solectron (Suzhou) Technology Co., Ltd. (the "Letter of Credit"); and
WHEREAS, based on and subject to the terms and conditions of this
Agreement, the Investors are willing to provide that portion of the Bridge
Financing which will be used to provide the Letter of Credit by acquiring from
the Company, for the aggregate purchase price set forth immediately below each
Investor's name on the execution pages hereto (the "Execution Pages"), (i) a
debenture in the principal amount set forth immediately below each such
Investor's name on the Execution Pages (each a "Debenture" and collectively the
"Debentures") convertible, at the option of each Investor, as set forth in the
Debenture, into either shares of Class B Preferred Stock or shares of Common
Stock, and (ii) a warrant (each a "Warrant" and collectively, the "Warrants") to
purchase that number of shares of Common Stock set forth immediately below each
such Investor's name on the Execution Pages.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
1.1 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, the Company hereby issues and sells to each Investor, and each
Investor hereby purchases from the Company, the Debenture and the Warrant for
the purchase price (the "Purchase Price") set forth immediately below such
Investor's name on the Execution Pages.
1.2 THE DEBENTURE. Each Debenture shall be in the aggregate principal
amount set forth immediately below each such Investor's name on the Execution
Pages, shall become due and payable on May 31, 1998 unless earlier terminated or
converted as provided therein (the "Debenture Due Date"), shall bear interest at
the rate of 6% per annum from the date of issuance, which interest shall be
payable in arrears in shares of Common Stock on the Debenture Due Date, and
shall have such other terms and conditions as are set forth in the form of
Debenture attached hereto as Exhibit A.
---------
<PAGE>
1.3 THE WARRANT. Each Warrant shall grant the Investor the right to
purchase from time to time and at any time for a period of three years from the
date of this Agreement up to the aggregate number of shares of Common Stock set
forth immediately below each such Investor's name on the Execution Pages, at an
exercise price per share and subject to such other terms and conditions as are
set forth in the form of Warrant attached hereto as Exhibit B.
---------
1.4 SECURITY INTEREST. In order to secure the Company's obligation to
pay the principal, premium if any, and interest under the Debentures, the
Company shall (i) assign to each Investor (pursuant to a Collateral Assignment
Agreement in the form attached hereto as Exhibit C) certain of the Company's
---------
rights with respect to 23,000 Cinemasters (the "Products") to be delivered to
Dell Products, L.P. ("Dell") by the Company pursuant to that certain letter
agreement (the "Letter Agreement") between the Company and Dell dated January 6,
1998, (the "Assignment") and (ii) grant to each Investor (pursuant to a Security
Agreement in the form attached hereto as Exhibit D), pro rata based on the
---------
relationship that the dollar amount of such Investor's Debenture bears to the
aggregate amount of all Debentures issued under this Purchase Agreement, a first
lien and security interest in and to the proceeds payable to the Company by Dell
under the Letter Agreement with respect to the Products (the "Security Interest"
and together with the Assignment, the "Security Interests"). The Security
Interests with respect to any Investor shall terminate on the earlier to occur
of (a) the closing of the Class B Financing and (b) payment by the Company of
the principal amount of such Investor's Debenture.
2. THE CLOSING.
2.1 DELIVERIES OF THE COMPANY. Concurrently with the execution of this
Agreement, the Company is delivering to each Investor:
(a) the Debenture;
(b) the Warrant;
(c) a certificate, executed by the President of the Company,
dated the date hereof, certifying that there does not exist as of the
date hereof a state of facts that would constitute an "Event of
Default" under this Agreement or the Debentures (collectively, all such
defaults being hereinafter referred to as "Defaults"), or which would,
with notice or lapse of time, or both, constitute such a Default, and
the Company is not in default under the terms, conditions or provisions
of its Articles of Incorporation, as amended, its By-laws, or any
indenture, mortgage or deed of trust or other material contract,
agreement, lease, instrument, court order, judgment, arbitration award,
or decree to which it is a party or by which it is bound or which state
of facts would, with notice or lapse of time, or both, constitute such
a default (collectively, "Other Defaults");
(d) copies of (i) resolutions adopted by the Board of Directors
of the Company authorizing and approving this Agreement, the issuance
of the Debentures, the Warrants, the shares of Class B Preferred Stock
into which the Debentures may be converted, assuming the closing of the
Class B Preferred Stock Financing (the "Conversion Preferred Shares"),
upon the filing of the
2
<PAGE>
Articles Amendment (as defined below), the shares of Common Stock into
which the Debentures may be converted as set forth in the Debentures
(the "Conversion Common Shares"), upon the filing of the Articles
Amendment, the shares of Common Stock to be issued as interest on the
Debentures (the "Interest Common Shares") and, upon the filing of the
Articles Amendment, the shares of Common Stock to be issued upon
exercise of the Warrants (the "Warrant Common Shares"), and the
consummation of all other transactions contemplated hereby, as and to
the extent required by applicable law, and (ii) action by partial
written consent of the shareholders of the Company representing more
than 50% of the outstanding voting securities of the Company (the
"Majority Shareholders") approving, among other matters, an amendment
(the "Articles Amendment") to the Company's Amended and Restated
Articles of Incorporation, as amended (as further amended by the
Articles Amendment, the "Articles of Incorporation"), to increase the
authorized capital stock of the Company, all such resolutions and
written consents being certified by the Secretary of the Company;
(e) copies of the Company's Articles of Incorporation and By-laws
as then in effect, all certified by the Secretary of the Company;
(f) a Subsistence Certificate for the Company issued by the
Secretary of the Commonwealth of the Commonwealth of
Pennsylvania, dated as of a recent date;
(g) an opinion letter, from Cozen and O'Connor, counsel to the
Company, addressed to the Investor, dated the date hereof, in
form and substance satisfactory to the Investor;
(h) a certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the
Company's officers and directors;
(i) an unqualified opinion of KPMG Peat Marwick LLP on the
Company's financial statements for the fiscal year ended
December 31, 1996; and
(j) a receipt for the full amount of the Purchase Price, before
deduction of the fees and expenses payable under Section 13.6.
2.2 DELIVERIES OF EACH INVESTOR AT THE CLOSING. Concurrently with the
execution of this Agreement, each Investor shall (i) pay the Purchase Price
(less fees and expenses payable under Section 13.6 for which the Investor has
submitted invoices at least one business day prior to the date hereof) to the
Company by wire transfer of immediately available funds in accordance with the
Company's written wire instructions, and (ii) deliver to the Company a receipt
for the fees and expenses deducted from the Purchase Price.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the date of this
Agreement, the Company represents and warrants to each Investor (regardless of
any investigation made or information obtained by such Investor), as a material
inducement to the Investor to enter into this Agreement, as follows:
3
<PAGE>
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction listed
in Schedule 3.1 attached hereto, such jurisdictions being all the jurisdictions
------------
in which it owns or leases properties or conducts any business so as to require
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company. The minute books and stock records of
the Company are complete and accurate in all material respects and all
signatures included therein are the genuine signatures of the persons whose
signatures are required. As used in this Agreement, "material adverse effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations, liabilities, or financial condition of the
Company, taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith.
3.2 SUBSIDIARIES, ETC. Except as set forth in Schedule 3.2, the
------------
Company has no subsidiaries and does not own any capital stock, security,
partnership interest or other interest of any kind in any corporation,
partnership, joint venture, association or other entity.
3.3 CAPITALIZATION. As of the date of this Agreement, and after giving
effect to the Articles Amendment, the Company's authorized capital stock
consists of (a) 50,000,000 shares of Common Stock, of which [14,183,835] shares
are issued and outstanding, 6,500,000 shares are reserved and available for
issuance pursuant to the Company's stock option and purchase plans, each
outstanding grant of which is described in Schedule 3.3, at the exercise prices
------------
set forth on Schedule 3.3 , and [6,963,351] shares are available for issuance
-------------
pursuant to currently outstanding options and warrants granted outside of the
Company's stock option and purchase plans, each of which is described in
Schedule 3.3, and (b) 31,523,684 shares of Preferred Stock, of which 6,523,684
- ------------
shares are designated Class A Convertible Preferred Stock, par value $.01 per
share (the "Class A Preferred Stock"), of which no shares are issued and
outstanding and all of which are reserved for issuance upon the exercise of all
the warrants (collectively, the "Prior Warrants") to purchase Class A Preferred
Stock at the exercise prices set forth in Schedule 3.3. There are no treasury
------------
shares held by the Company. All outstanding shares of capital stock of the
Company have been, or upon issuance will be, validly issued, fully paid and
nonassessable. Except as disclosed in Schedule 3.3, no shares of capital stock
------------
of the Company are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company or were issued in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state, provincial or municipal securities laws. Except as set forth
in this Section 3.3 or in Schedule 3.3, as of the date of this Agreement, (i)
------------
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company is obligated to register the
sale of any of its securities under the Securities Act (except
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<PAGE>
this Agreement) and (iv) there are no outstanding securities of the Company
which contain any redemption or similar provisions, or any contracts,
commitments, understandings or arrangements by which the Company is or may
become bound to redeem or purchase a security of the Company. Except as
disclosed in Schedule 3.3, there are no securities or instruments containing
------------
anti-dilution or similar provisions that will be triggered by the issuance of
the Debenture, the Warrant or any Conversion Shares (collectively, the
"Securities"). The Company has furnished to the Investor true and correct copies
of the Company's Articles of Incorporation and By-laws, and the terms of all
securities convertible into or exercisable for any shares of capital stock of
the Company and the material rights of the holders thereof in respect thereto. A
current shareholders' list giving the names, addresses and number of shares of
capital stock of the Company owned by each shareholder of the Company is
attached hereto as part of Schedule 3.3.
------------
3.4 AUTHORIZATION. Subject to the filing of the Articles Amendment,
which shall occur on December 29, 1997 (the "Effective Date"), the Company has
all necessary corporate power and authority to enter into and perform this
Agreement, the Debenture, the Warrant and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "Transaction Documents"), and to issue and
deliver the Securities in accordance with the terms hereof and thereof. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation of the transactions contemplated hereby and thereof,
including, without limitation, the issuance and sale of the Debenture and the
Warrant, and the issuance of the Conversion Preferred Shares (assuming the
closing of the Class B Preferred Stock Financing), the Conversion Common Shares,
the Interest Common Shares and the Warrant Common Shares (collectively, the
"Conversion Shares"), have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its shareholders except in connection with the
authorization and issuance of the Class B Preferred Stock, the terms of which
are still being negotiated in connection with the Class B Preferred Stock
Financing. The Transaction Documents have been duly executed and delivered by
the Company. Each of the Transaction Documents constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to or affecting generally the enforcement
of creditors' rights and remedies.
3.5 ISSUANCE OF SECURITIES. The Debenture and the Warrant are duly
authorized for issuance and sale to the Investor by the Company pursuant hereto
and, upon issuance in accordance with the terms hereof, shall be valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to or affecting
generally the enforcement of creditors' rights and remedies. Upon the Effective
Date, the Conversion Common Shares will have been duly authorized and reserved
for issuance upon conversion of the Debenture and upon such issuance the
Conversion Common Shares will be validly issued, fully paid and nonassessable
5
<PAGE>
and free from all taxes, liens and charges with respect to the issue thereof.
Upon the Effective Date, the Interest Common Shares will have been duly
authorized and reserved for issuance in accordance with the terms and conditions
of this Agreement and the Debenture and, upon such issuance will be fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof. Upon the Effective Date, the Warrant Common Shares will have
been duly authorized and reserved for issuance upon exercise of the Warrants in
accordance with the terms and conditions of this Agreement and the Warrants, and
upon such issuance will be fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof. Subject to the filing, if
required, of a Form D, the issuance by the Company of the Securities is exempt
from registration under the Securities Act.
3.6 CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS. Except as
described on Schedule 3.6, the Company is not a party to or bound by any
------------
written, oral or implied contract, agreement, lease, power of attorney,
guaranty, surety arrangement, or other commitment in excess of $50,000
including, but not limited to, any contract or agreement for the purchase or
sale of merchandise or for the rendering of services, but excluding any purchase
orders to the Company in the normal course of its business.
3.7 BREACH. The Company is not in violation or breach of any of the
terms, conditions or provisions of the Articles of Incorporation or the By-laws,
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract, agreement, lease, instrument, court order,
judgment, arbitration award or decree to which it is a party or by which it is
bound.
3.8 EMPLOYEES, OFFICERS AND DIRECTORS. A current list of the names and
addresses of all officers and directors of the Company is attached hereto as
Schedule 3.8. Except as described on Schedule 3.8, the Company has not entered
- ------------ ------------
into any employment or other agreements with any of its employees, officers or
directors, or any of its former employees, officers or directors.
3.9 COMPLIANCE WITH LAWS. Except as described in Schedule 3.9, the
------------
Company is in compliance with all existing requirements of laws, including but
not limited to federal, state, local and foreign laws, rules and regulations,
and all existing requirements of all governmental bodies or agencies having
jurisdiction over it, the failure to comply with which might have a material
adverse effect on the Company, its assets, business or prospects.
3.10 CONFLICT WITH DOCUMENTS. Except as disclosed in Schedule 3.10 or
-------------
as explicitly provided in this Agreement, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation of
the transactions contemplated hereby and thereby (including, without limitation,
the reservation for issuance and the issuance of the Conversion Shares other
than the Conversion Preferred Shares), either immediately or with the passage of
time or the giving of notice or both, will not:
(a) conflict with or cause a material breach or an Event of
Default under any of the terms, conditions or provisions of, result in
a termination or modification of, or cause any acceleration of any
obligation of the Company under any material contract, lease or other
instrument to which the Company is bound or by which any of the
Company's properties or assets may be affected;
6
<PAGE>
(b) subject to the filing of the Articles Amendment on the
Effective Date, result in a violation of the Articles of Incorporation
or the By-laws or any statute, law, rule or regulation or any order,
judgment or decree to which the Company or any of its properties or
assets are subject; or
(c) result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material
properties or assets.
[3.11 FINANCIAL STATEMENTS. The Company has furnished to the Investor
copies of its audited annual financial statements for the fiscal year ended
December 31, 1996, and its unaudited financial statements for each month in 1997
through October and for the year of 1997 through October 31, 1997, all of which
are attached hereto as Schedule 3.11. The audited and unaudited financial
-------------
statements referred to above are correct and in accordance with the Company's
books and records, and each presents fairly, in all material respects, the
Company's financial position at the end of the period specified and the results
of its operations and financial condition for such period, subject to normal
recurring adjustments.]
3.12 TAXES. The Company has filed all applicable federal, state, local
and foreign tax returns required to be filed to date, in accordance with the
provisions of law pertaining thereto, and has paid all taxes, interest,
penalties and assessments required to have been paid to date. The Company has
not been advised that any of its returns, whether federal, state, local or
foreign, have been or are being audited as of the date hereof.
3.13 LITIGATION. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its properties or rights,
the Common Stock or any of the Company's officers or directors in their
capacities as such.
3.14 INTANGIBLE PROPERTY. Except as set forth on Schedule 3.14, the
-------------
Company has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company, all permits,
licenses and other authority, necessary to the conduct of its business as
presently constituted and conducted, and as proposed to be constituted and
conducted.
3.15 TRADEMARKS, PATENTS, ETC. The corporate names of the Company, and
the trade names, trademarks, and service marks listed on Schedule 3.15 are the
-------------
only names and marks which are used by the Company in the operation of its
business. Except as set forth on Schedule 3.15, no claim has been asserted
-------------
against the Company involving any conflict or claim of conflict of its trade
names, trademarks or service marks or with the trade names, trademarks, service
marks or corporate names of others, and, to the best of the knowledge of the
Company and except as set forth on Schedule 3.15, there is no basis for any such
-------------
claim of conflict. Except as set forth on Schedule 3.15 and to the best of the
-------------
knowledge of the Company, the Company is the sole and exclusive owner of its
trade names, trademarks and service marks and has the sole and exclusive right
to use such trade names, trademarks and service marks. The Company is the
registered owner of the United States and foreign patents listed on Schedule
--------
3.15 and has
- ----
7
<PAGE>
applications pending with the U.S. Patent Office and/or foreign patent offices
for the patents listed on Schedule 3.15 as being patents pending. The Company
-------------
has no knowledge of any adverse claim of any kind with respect to any of such
patents or patent applications, nor does it have any knowledge, or reason to
know, that a patent will not issue on any such patent application. Except as set
forth on Schedule 3.15 and to the best of the knowledge of the Company, no
-------------
process used by the Company or any product manufactured or sold by the Company
infringes upon any patent, patent application, trademark, trade name or service
mark of any other party. There has been no claim of infringement of and, to the
best of the knowledge of the Company and except as set forth on Schedule 3.15,
-------------
the Company is not infringing on any third party's patent, license, trademark,
trade name, service mark, copyright or other proprietary right.
3.16 ENVIRONMENTAL LAWS. (i) The Company (x) is in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety or emissions, discharges,
releases, threatened releases, removal, remediation or abatement of pollutants,
contaminants, chemicals or industrial, hazardous or toxic substances or wastes
into or in the environment (including without limitation air, surface water,
ground water or land), or otherwise used in connection with the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous or toxic substances or wastes,
as defined under such applicable laws ("Environmental Laws"), (y) has received
all permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (z) is in compliance with all
terms and conditions of any such permit, license or approval, except to the
extent that the matters within clauses (x), (y) or (z) above would not have a
material adverse effect.
(ii) There is no substance designated a "hazardous substance" by any
Environmental Law, including asbestos, petroleum, urea formaldehyde insulation
and petroleum by-products ("Hazardous Substance") present at any of the real
property currently owned or leased by the Company, except to the extent that
such presence could not reasonably be expected to have a material adverse
effect; and with respect to such real property, to the knowledge of the Company,
there has not occurred (x) any release or any threatened release of a Hazardous
Substance or (y) any discharge or threatened discharge of any Hazardous
Substance into the ground, surface or navigable waters, which discharge or
threatened discharge violates any federal, state, local or foreign laws, rules
or regulations concerning water pollution.
(iii) The Company has not disposed of, transported, or arranged for
the transportation or disposal of any Hazardous Substance where such disposal,
transportation or arrangement would give rise to liability pursuant to any
Environmental Law other than any such liabilities that could not reasonably be
expected to have a material adverse effect.
(iv) To the knowledge of the Company, there are no underground
storage tanks, asbestos-containing materials, polychlorinated biphenyls or urea
formaldehyde insulation at any of the real property currently owned or leased by
the Company in violation of any Environmental Law.
3.17 INSURANCE. The Company maintains insurance on all of its
insurable properties as listed on Schedule 3.17 attached hereto. All such
-------------
insurance policies are in full force
8
<PAGE>
and effect and the Company is not in default of any provision thereof. The
Company has not received notice from the issuer of any such insurance policies
of its intention to cancel or refusal to renew any policy issued by it.
3.18 GOVERNMENTAL CONSENT. No permit, consent, approval or
authorization of, or filing with, any governmental regulatory authority or
agency is required of the Company in connection with the execution, delivery and
performance of the Transaction Documents, or the consummation of the
transactions contemplated hereby and thereby, except as may be required by any
federal or state securities laws, with which the Company will comply.
3.19 LIABILITIES. The Company has no liabilities, whether related to
tax or non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, or otherwise, except (i) as provided in the
balance sheet of the Company as of October 31, 1997 set forth at Schedule 3.11,
-------------
(ii) as set forth on Schedule 3.19 or (iii) for liabilities of a non-material
-------------
nature incurred in the normal course of the Company's business since that date.
3.20 ASSETS. The Company has good and marketable title to all of its
assets free and clear of all liens, charges, claims, encumbrances and defects of
any kind or character, except as set forth on Schedule 3.20 (collectively,
-------------
"Permitted Liens"). To the best of the knowledge of the Company, all equipment,
furniture and fixtures, and other tangible personal property of the Company are
in good operating condition and repair and do not currently require any repairs
other than normal routine maintenance to maintain such property in good
operating condition and repair.
3.21 CONFLICTING INTERESTS. Except as set forth on Schedule 3.21 no
-------------
director, officer, or any relative or affiliate of any director or officer, or,
to the best of the knowledge of the Company, any employee or shareholder of the
Company or any relative or affiliate of any of the employees or shareholders (a)
has any pecuniary interest in any supplier or customer of the Company or in any
other business enterprise with which the Company conducts business or with which
the Company is in competition; or (b) is indebted to the Company for money
borrowed.
3.22 NO PAYMENTS TO SHAREHOLDERS OR OTHERS. Except as set forth on
Schedule 3.22, there has not been any purchase or redemption of any shares of
- -------------
stock of the Company by the Company or any transfer, distribution or payment by
it, directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payments made in the ordinary
course of business for goods and services in arm's length transactions, and (ii)
wages paid to non-executive employees. The salaries and benefits payable to the
officers of the Company have not been increased since May 31, 1997.
3.23 ABSENCE OF MATERIAL CHANGES. Except as set forth in Schedule 3.23
-------------
attached hereto, since December 31, 1996:
(a) there has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or
affairs of the Company or any material physical damage or loss to any
of its properties or assets or to the
9
<PAGE>
premises occupied by it (whether or not such damage or loss is covered
by insurance);
(b) the Company has not taken any action outside of the ordinary
and usual course of its business, except as related to the transactions
contemplated hereby;
(c) the Company has not borrowed any money or become
contingently liable for any obligation or liability of others;
(d) the Company has paid all of its debts and obligations as
they became due;
(e) except for the Debenture to be issued hereunder, the Company
has not incurred any debt, liability or obligation of any nature to any
party, except for obligations arising from the purchase of goods or the
rendition of services in the ordinary course of business;
(f) the Company has not knowingly waived any right of
substantial value;
(g) the Company has maintained its books, accounts and records
in the usual, customary and ordinary manner; and
(h) the Company has used its best efforts to preserve its
business organization intact, to keep available the services of its
employees, and to preserve its relationships with its customers,
suppliers and others with whom it deals.
3.24 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. No provisions in
the Transaction Documents relating to the Company or any other document,
schedule, exhibit or other information furnished by the Company to the Investor
in connection with the execution, delivery and performance of the Transaction
Documents, or the consummation of the transactions contemplated hereby and
thereby, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated in order to
make the statement, in light of the circumstances in which it is made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR AND RESTRICTIONS ON
TRANSFER.
4.1 REPRESENTATIONS AND WARRANTIES BY THE INVESTORS. Each Investor
represents and warrants to the Company as follows:
(a) The Investor (i) is acquiring the Debenture and the Warrant
and (ii) upon conversion of the Debenture or the Class B Preferred
Stock, or upon exercise of the Warrant, will acquire the applicable
Conversion Shares then issuable, for investment for its own accounts
and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands
10
<PAGE>
that the Securities have not been registered under the Securities Act,
or under any state securities or "Blue Sky" laws, and, as a result, are
subject to substantial restrictions on transfer. The Investor
acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Securities Act and any applicable
state securities or "Blue Sky" laws, or exemptions from registration
under the Securities Act and such laws are available; provided,
however, that by making the representations herein, the Investor does
not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at
any time in accordance with or pursuant to a registration statement or
an exemption from registration under the Securities Act and any
applicable state securities or "Blue Sky" laws.
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors rights and
to general equity principles.
(c) The Investor is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D under the Securities Act.
(d) [STATE REPRESENTATION]
4.2 LEGENDS. The Investor understands that the certificates or other
instruments representing the Debenture and the Warrant and, until such time as
the sale of the Conversion Shares have been registered under the Securities Act,
the stock certificates representing the Conversion Shares, except as set forth
below, shall bear a restrictive legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND SUCH LAWS.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the Securities Act, (ii) in connection
with a sale transaction, such holder provides the Company with an opinion of
counsel, in a form reasonably acceptable to the Company's counsel, to the effect
that a public sale, assignment or transfer of such Securities may be made
without registration under the Securities Act, or (iii) such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company's counsel, that such Securities can be sold pursuant to Rule 144(k)
promulgated under the Securities Act (or a successor rule thereto) ("Rule 144").
The Investor acknowledges, covenants and agrees to sell the Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement effective
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under the Securities Act, or (ii) advice of counsel that such sale is exempt
from registration required by Section 5 of the Securities Act.
5. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in Sections 3.3, 3.4 and 3.5 hereof
shall survive the consummation of the transactions provided for in the
Transaction Documents and shall not terminate. All other representations and
warranties contained herein shall survive the consummation of the transactions
provided for in the Transaction Documents for a period beginning on the date
hereof up to and including the earlier of the conversion of all Class B
Preferred Stock held by the Investor into Common Stock or December 31, 1999;
provided, however, that such period shall not end prior to December 31, 1998.
No such representation or warranty shall be deemed to have been waived, affected
or impaired by any investigation made by any person or persons.
6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants to
comply with the following affirmative covenants, unless waived by the Investor
(or Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed
to have also waived such covenant), as long as the Debenture remains
outstanding; provided, however, that in the event the Debenture is converted
into shares of Class B Preferred Stock, the Company shall provide to the
Investor all such information and rights as the Company provides to any other
holder of Class B Preferred Stock, whether pursuant to the Company's Articles of
Incorporation, as amended, contract or otherwise; and provided, further, that
the Company shall comply with Section 6.2, unless waived by the Investor (or
Atlantic Coastal Ventures, L.P., in which case the Investor shall be deemed to
have also waived such covenant), until the earlier of (i) such time as the
Investor owns no Debentures, no Warrants, no Class B Preferred Stock and fewer
than 100,000 shares of Common Stock or (ii) the closing of an underwritten
initial public offering of any of the Company's securities under the Securities
Act (or any successor statute), yielding gross proceeds to the Company of at
least $7,500,000.
6.1 FINANCIAL STATEMENTS. The Company shall furnish to the Investor
the following financial statements, reports and other documents, such financial
statements to be prepared in accordance with generally accepted accounting
principles consistently applied, certified by the Company's chief executive or
financial officer:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of the Company, a balance sheet of the
Company as of the end of such fiscal year and related statements of
operations, shareholders' equity and cash flows for such fiscal year,
all in reasonable detail and setting forth in comparative form the
figures as of the end of and for the previous fiscal year, which
financial statements shall have been audited, and shall be accompanied
by an unqualified opinion addressed to the Company from "Big Six"
independent auditors or other independent auditors that are reasonably
satisfactory to the Investor, together with a copy of such auditors'
letter to Company's management;
(b) as soon as available, and in any event within 20 days after
the end of each month for such month and for the year to date, an
unaudited balance sheet and unaudited statements of operations,
shareholders' equity and cash flows,
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together with a comparison of such financial statements with the budget
of the Company for such period; and
(c) as soon as available, and in any event at least 60 days prior
to the end of each fiscal year of the Company, an annual budget and
business plan for the subsequent fiscal year, which budget and business
plan shall include a monthly breakdown of financial statements, which
breakdown shall include the underlying assumptions and a brief
qualitative description of the Company's plan by the Company's Chief
Executive Officer in support of such budget and business plan, which
also shall have been approved and accepted by the Board of Directors of
the Company. If during the course of operations for any such month it
becomes apparent that deviations from such financial statements, budget
and business plan have occurred, the Company shall submit to its Board
of Directors a statement of such deviation within five business days
from the date of the Company's knowledge of such deviation (the
"Statement"). The Statement shall detail the manner in which a new
financial projection deviates from the annual business plan and the
reason therefor. The Board of Directors shall have the right to ask
questions or request any other reasonable additional information with
respect to the Statement. Any and all subsequent deviations from such
financial statements shall be resubmitted to the Board of Directors of
the Company for approval and acceptance or for required further
revision until such approval and acceptance is obtained.
In the event that the Company at any time hereafter is required, by law or by
generally accepted accounting principles, to consolidate its financial
statements with those of a subsidiary corporation, the Company shall thereafter
furnish the financial statements required by this Section 6.1 on a consolidated
basis, and the monthly and annual financial statements specified above shall be
furnished with consolidating financial statements.
6.2 ADDITIONAL INFORMATION.
(a) The Company shall, as promptly as possible (but, in any
event, within ten days) after obtaining knowledge of the occurrence of
any "Default" (as such term is defined in Section 2.1(c) above), or any
other material adverse development or event, furnish the Investor with
a detailed written notice of such default or event and the proposed
response of Company management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the
Investor with notice of all material actions, suits and proceedings
before any court or governmental agency, commission, board, bureau,
department or instrumentality, domestic or foreign, affecting the
Company.
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or
directors of the Company, and all written consents taken by the
shareholders and/or directors of the Company.
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(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the
same, furnish the Investor with all reports and financial statements
that the Company shall send or make available to the shareholders or
the directors of the Company or the Securities and Exchange Commission.
(e) The Company shall promptly furnish the Investor with copies
of all material contracts, indentures, instruments and agreements the
Company provides to any investor in the Class B Preferred Stock
Financing or in any other additional bridge financing, when such
documents are provided to such investor.
(f) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the
condition of operations, financial or otherwise, of the Company as the
Investor may, from time to time, reasonably request.
(g) The Investor agrees not to disclose to third parties any
information concerning the Company which is furnished to the Investor
by the Company and designated as confidential, except as required by
law, legal process or its fiduciary duty to report financial and
business information to its partners, shareholders, directors or
affiliates and to such other persons as the Investor, in the exercise
of its prudent business judgment, may select and shall use reasonable
commercial efforts to have such persons maintain such confidentiality
of the confidential information. The term "confidential information"
does not include information which (i) was or becomes generally
available to the public other than as a result of a disclosure by the
Investor, or (ii) was or becomes available to the Investor on a non-
confidential basis from a source other than the Company, provided that
such source is not bound by a confidentiality agreement with the
Company.
6.3 INSPECTION. The Company shall permit, at any reasonable time and
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION AND BY-LAWS. The Company
shall perform and observe all the obligations and provisions set forth in the
Articles of Incorporation and the By-laws.
6.5 MAINTAIN RIGHTS AND FACILITIES. The Company shall maintain and
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
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6.6 BOOKS AND RECORDS. The Company shall make and keep books, records
and accounts, which, in reasonable detail accurately and fairly reflect its
transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (a) transactions are
executed in accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of the financial
statements required herein and to maintain accountability for assets; and (c)
access to assets is permitted only in accordance with management's general or
specific instructions and recorded assets are compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
difference.
6.7 OTHER INSURANCE. The Company shall maintain insurance against such
risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.8 CONTRACTS AND AGREEMENTS. The Company shall comply in all material
respects with the provisions of all material contracts, indentures, instruments
and agreements to which it is a party or by which the Company or its properties
are bound, and with all other material obligations which the Company incurs or
to which it becomes subject.
6.9 TAXES. The Company shall pay and discharge when due all federal,
state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
however, that the Company may in good faith contest any tax, assessment,
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.10 COMPLIANCE WITH LAWS. The Company shall comply with all laws,
rules and regulations of all governmental authorities and agencies applicable to
the Company, its business or its properties, the failure to comply with which
might have a material adverse effect on the Company.
7. NEGATIVE COVENANTS. The Company hereby covenants that as long as the
Debenture remains outstanding the Company shall comply with the following
negative covenants unless such covenant is waived by the Investor; provided,
however, that a waiver of any covenant or the approval of any action hereunder
by Atlantic Coastal Ventures, L.P. ("Atlantic") shall be deemed to constitute a
waiver of such covenant or approval of such action by the Investor.
7.1 CONDUCT OF BUSINESS. The Company shall not:
(a) (i) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation
or other entity or entities; (ii) reorganize, dissolve or liquidate the
Company, or adopt any plan of reorganization, dissolution or
liquidation of the Company; (iii) sell, assign or otherwise dispose of
all or any substantial portion of its assets; or (iv) acquire all or
any substantial portion of the voting stock or assets of another
corporation or
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other entity or entities; provided, however, the Company may complete
its proposed acquisition of VIONA Development Hard- & Software
Engineering, GmbH, with the cash portion of the purchase price not to
exceed $2,500,000 (excluding any applicable taxes that the Company has
agreed to assume);
(b) except as otherwise required, permitted or acknowledged by
this Agreement or any Schedule hereto, create, authorize or issue any
additional shares of capital stock or any rights to acquire any shares
of capital stock or any other security, or repurchase any shares of its
capital stock except from employees upon termination of employment;
(c) incur, create, assume or guarantee any indebtedness which
ranks senior or pari passu in the right of payment to the Debenture,
other than additional pari passu bridge financing of up to $750,000 on
the same terms and considerations contemplated hereby, which the
Company may obtain following the execution of this Agreement;
(d) except as contemplated by this Agreement, amend the Articles
of Incorporation or the By-laws; or
(e) effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the
conduct of the business of the Company, as such business is conducted
and proposed to be conducted.
7.2 LIENS AND ENCUMBRANCES. Except for Permitted Liens (as defined in
Section 3.20), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent.
7.3 DIVIDENDS. The Company shall not declare or pay any dividend
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than as required, permitted
or acknowledged by this Agreement or the Articles of Incorporation.
7.4 AGREEMENTS. The Company shall not enter into any contract,
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Debenture, or
which otherwise restricts, in any material respect, the Company's ability to
perform under the Transaction Documents.
7.5 INSIDER TRANSACTIONS. Except as disclosed in Schedules 3.21 and
--------------
3.22, the Company shall not enter into any transaction with any of its officers,
- ----
directors or shareholders, unless such transaction is an arm's-length
transaction on fair and reasonable terms, and shall not increase in any way the
compensation payable, directly or indirectly, to any of the Company's officers.
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7.6 CAPITAL EXPENDITURES. The Company shall not incur, in any twelve-
month period, capital expenditures (including expenditures for capitalized
leases) in excess of $150,000 or any single capital expenditure in excess of
$60,000, unless such expenditures were explicitly included in an approved budget
of the Company. Notwithstanding the foregoing, the Company shall obtain the
prior written approval of the Investor with respect to any expenditure submitted
to NEPA Venture Fund II, L.P. ("NEPA II") for its approval.
7.7 PAYMENTS, NO DEFAULT. The Company shall make all required payments
of rent, taxes, debts and other material obligations of the Company promptly
when due. The Company shall not be in default with respect to any material
contracts, agreements or instruments to which the Company is a party or by which
the Company is bound.
7.8 MATERIAL CONTRACTS. The Company shall not, during any fiscal year
of the Company, enter into material contracts, other than in the ordinary course
of business, pursuant to which the Company would incur liabilities in excess of
$50,000 individually or $100,000 in the aggregate, unless the Board of Directors
of the Company has previously approved the execution of such contracts or such
contracts were explicitly included in an approved budget of the Company.
Notwithstanding the foregoing, the Company shall obtain the prior written
approval of the Investor with respect to any material contracts submitted to
NEPA II for its approval.
8. REGISTRATION AND RELATED RIGHTS.
8.1 PIGGYBACK REGISTRATION.
(a) As used in this Section 8, "Registration Stock" shall mean
any Securities or any other shares of Common Stock, Class B Preferred
Stock or other securities received by holders of the Securities upon
any stock split, stock dividend, recapitalization, merger,
consolidation or similar event; provided, however, that Registration
Stock shall not include any Securities or such other securities
disposed of pursuant to one or more registration statements under the
Securities Act, or which have been sold pursuant to Rule 144 (as
previously defined) or which have otherwise been sold without
registration under the Securities Act. For purposes of this Section 8,
any record holder of securities convertible into Registration Stock (or
exercisable for or payable in Registration Stock) shall be deemed to be
the holder of the Registration Stock issuable upon such conversion
and/or exercise and/or payment.
(b) If the Company should seek to register under the Securities
Act or qualify any of the securities holdings of the Company or any of
its shareholders (except in connection with any stock option plan,
stock purchase plan, savings or similar plan or an acquisition, merger
or exchange of stock, to be registered on Forms S-4, S-8 or any
successor forms under the Securities Act) and if the form of
registration statement proposed to be used otherwise may be used for
the registration of the Registration Stock, then, on each such
occasion, the Company shall furnish the Investor with at least 30 days
prior written notice thereof. At the written request of the Investor,
given within 20 days after the receipt of such
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notice, the Company will use its best efforts to cause all of the
Registration Stock for which registration shall have been requested by
the Investor to be included in such registration statement. In the
event that the proposed registration by the Company is, in whole or in
part, an underwritten public offering of securities of the Company, and
the managing underwriter determines and advises in writing that the
inclusion of all Registration Stock proposed to be included in the
underwritten public offering and other issued and outstanding shares of
Common Stock proposed to be included therein by persons other than (i)
holders of Registration Stock or (ii) holders of Subordinate Shares (as
defined in Section 8.4) with rights equal to those of the holders of
Registration Stock ("Other Registration Stock") (such other shares
which are not Registration Stock or Other Registration Stock being the
"Other Shares") would interfere with the successful marketing
(including pricing) of the securities, then the number of shares of
Registration Stock, Other Registration Stock and Other Shares to be
included in such underwritten public offering shall be reduced first,
pro rata among the holders of Other Shares; second, if necessary, pro
rata among the holders of Registration Stock and Other Registration
Stock combined, based on the number of shares requested by holders
thereof to be registered in such underwritten public offering; and
lastly, if necessary, among the Company's shares requested by the
Company to be registered; provided, however, that the holders of
Registration Stock do not then elect to exercise their rights under
Section 8.2; and, further provided, that in no event, without the
consent of the holders of at least 67% of the Registration Stock, shall
the percentage of the Registration Stock that is included in such
registration statement be less than the percentage of the securities of
any other shareholder included therein. In the event that the Company
offers any of its securities in an offering exempt from registration
under the Securities Act pursuant to Regulation A, the Company will
provide to the holders of Registration Stock rights comparable to those
provided herein.
8.2 DEMAND REGISTRATION.
(a) After the closing of an underwritten offering of the Common
Stock, if at any time the Company is requested in writing by the
holders of not less than 67% of the Registration Stock to effect the
registration under the Securities Act of at least 33 1/3% of the
Registration Stock, the Company shall promptly give written notice of
such proposed registration to all record holders of Registration Stock.
Such holders shall have the right, by giving written notice to the
Company within 30 days from receipt of the Company's notice, to elect
to have included in such registration such of their Registration Stock
as such holders may request in such notice of election. Thereupon, the
Company shall, as expeditiously as possible, use its best efforts to
effect the registration, on a form of general use under the Securities
Act, of all shares of Registration Stock which the Company has been
requested to register; provided, however, that if the holders of not
less than 67% of the Registration Stock shall so request (and at least
50% of the Registration Stock is being registered), the Company shall
file such registration statement pursuant to Rule 415 or any successor
rule or regulation under the Securities Act, so as to permit the
continuous or delayed offering of the
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Registration Stock in accordance with the intended method of
disposition specified in the notice of the exercise of rights under
this Section 8.2(a), to the extent such offering qualifies under such
rule or regulation, but in no event shall the Company be required to
maintain the effectiveness of such registration statement beyond a two
year period. The Company shall be obligated to cause to become
effective one registration statement pursuant to which Registration
Stock is sold under this Section 8.2(a).
(b) In addition and not in limitation of the rights set forth in
Sections 8.1(b) and 8.2(a), at such time as the Company shall have
qualified for the use of a short form Form S-3 in an offering solely
for the accounts of persons other than the Company (or any similar form
or forms promulgated by the Securities and Exchange Commission), the
holders of not less than 67% of the Registration Stock shall have the
right to request an unlimited number of registrations on Form S-3 or
other similar forms. Holders shall have the right, by giving written
notice to the Company within 20 days from receipt of notice from the
Company of such request, to elect to have included in such registration
such of their Registration Stock as such holders may request in such
notice of election. Thereupon, the Company shall, as expeditiously as
possible, use its best efforts to effect the registration, on Form S-3
of all shares of Registration Stock which the Company has been
requested to register. The Company shall not be required to effect any
such registration more than once every twelve months. Registrations
effected on Form S-3 shall not be considered to be demand registrations
pursuant to Section 8.2(a) hereof.
(c) The Company may include in a registration requested under
this Section 8.2 any additional authorized shares of the Common Stock
of the Company, whether or not issued, for sale by the Company or for
sale by others; provided, however, that such shares shall not be
included to the extent that the holders of a majority of the shares of
Registration Stock included therein determine in good faith that the
inclusion of such shares will interfere with the successful marketing
of the shares of Registration Stock to be included therein; and,
provided, further, that, upon the election of the holders of a majority
of the shares of Registration Stock included therein, or if the number
of shares to be so included equals or exceeds the number of shares of
Registration Stock included therein by the holders of Registration
Stock, such registration shall be deemed to be a registration pursuant
to Section 8.1(b) hereof.
(d) The underwriter and the terms of the underwriting for any
registration pursuant to this Section 8.2 shall be mutually acceptable
to the Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to the
contrary:
(i) The Company reserves the right to delay any such
registration pursuant to Section 8 for a period of not more than
sixty days,
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or to withhold efforts to cause such registration statement to
become effective for a period of not more than sixty days, if the
Board of Directors of the Company determines in good faith that
such registration might (A) interfere with or affect the
negotiation or completion of any material transaction that is
being contemplated by the Company, or (B) involve initial or
continuing disclosure obligations materially adverse to the best
interests of the Company's shareholders. If, after a registration
statement becomes effective, the Company advises the holders of
the Registration Stock covered by such registration statement that
the Company considers it appropriate for the registration
statement to be amended, the holders of such shares shall suspend
any further sales of their registered shares until the Company
advises them that the registration statement has been amended. The
time periods referred to in this Section 8 shall be extended for
an additional number of business days during which the rights to
sell shares was suspended.
(ii) The Company shall not be obligated to file a
registration statement pursuant to Section 8.2 within three months
after the effective date of any registration under which piggyback
rights were granted pursuant to Section 8.1.
8.3 FURTHER OBLIGATIONS OF THE COMPANY. Whenever the Company is
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to:
(a) prepare for filing and file with the Securities and Exchange
Commission promptly thereafter a registration statement and such
amendments and supplements to said registration statement and the
prospectus used in connection therewith as may be necessary to keep
said registration statement effective and to comply with the provisions
of the Securities Act with respect to the sale of securities covered by
said registration statement for the period necessary (but, other than
as otherwise provided in Section 8.2(a), in no event more than nine
months) to complete the proposed public offering;
(b) furnish to each selling holder so requesting such copies of
preliminary and final prospectus and such other documents as said
holder may reasonably request to facilitate the public offering of such
holder's Registration Stock;
(c) use its best efforts to register or qualify the Registration
Stock covered by said registration statement under the securities or
"Blue Sky" laws of such jurisdictions as the holders of Registration
Stock may reasonably request, to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and do any and all other acts and things that may be
reasonably necessary or advisable to enable such seller to consummate
the disposition in such jurisdictions of its Registration Stock covered
by such registration statement, except that the Company shall not for
any such purpose be
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required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not, but for the requirements of
this subdivision (c), be obligated to be so qualified, or to subject
itself to taxation in any such jurisdiction, or to consent to general
service of process in any such jurisdiction;
(d) furnish to the selling holders, and any underwriters or
broker-dealers through whom the Registration Stock may be sold, an
opinion or opinions of counsel for the Company and a "cold comfort"
letter or letters of the independent auditors for the Company, in form
and substance customary for similar offerings;
(e) permit each selling holder or the selling holder's counsel or
other representatives, at the selling holder's expense, to inspect and
copy such corporate documents and records as may reasonably be
requested by them;
(f) if so requested, furnish to each selling holder a copy of all
documents filed and all correspondence to or from the Securities and
Exchange Commission in connection with any such offering;
(g) immediately notify each seller of Registration Stock covered
by such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing, and at the request of any such seller or
holder, prepare and furnish to such seller and holder a reasonable
number of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers
of such Registration Stock, such prospectus shall not include 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 not
misleading in the light of the circumstances then existing;
(h) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve
months, but not more than eighteen months, beginning with the first
month of the first fiscal quarter after the effective date of such
registration statement, which earnings statement shall satisfy the
provisions of Section 13(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); and
(i) provide and cause to be maintained a transfer agent and
registrar for all registrable securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement.
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If requested by the Company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Securities and Exchange Commission in connection therewith.
8.4 REGISTRATION RIGHTS EQUAL OR SUPERIOR. The Company shall not grant
any registration rights or register any securities for the account of any person
other than holders of Registration Stock unless permitted to do so by the
written consent of the holders of not less than 67% of the Registration Stock
(such securities being the "Subordinate Shares").
8.5 EXPENSES, ETC. All expenses in connection with the preparation and
filing of any registration statement under this Section 8, any registration or
qualification under the securities or "Blue Sky" laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with "Blue Sky" or state securities
laws, (iii) other fees or expenses expressly applicable to securities being sold
by the selling shareholder, and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 INDEMNIFICATION. The Company shall indemnify the selling holders
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock was registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto (unless cured by an amendment or supplement
to the prospectus delivered to the selling holders prior to the sales of the
Registration Stock that is subject to the claimed right of indemnification), or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading (unless cured by an amendment or supplement to the prospectus
delivered to the selling holders prior to the sales of the Registration Stock
that is subject to the claimed right of indemnification); and will reimburse the
selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such selling holders in connection with
investigating or defending against such loss, claim, damage, liability or
action; except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such selling holders expressly for use
therein. In connection with any such registration statement, the selling holders
of Registration Stock will furnish the company in writing such information as
may reasonably be requested by the Company for use in any such registration
statement or prospectus and will indemnify the Company, its directors and
officers, and, to the extent required in any agreement with any underwriter or
broker-dealer, each such underwriter or broker-dealer and each person, if any,
who controls the Company or any
22
<PAGE>
underwriter or broker-dealer (within the meaning of the Securities Act) against
any losses, claims, damages, liabilities, expenses and actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact required to be
stated in such registration statement or prospectus and necessary to make the
statements therein not misleading; and will reimburse the Company for any legal
or other out-of-pocket expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; but only to the extent that such untrue statement or omission was
contained in information so furnished in writing by the selling holders of
Registration Stock expressly for use therein, and only to the extent of proceeds
received by the selling holders of Registration Stock in the offering. The
Company further agrees and the selling shareholders shall agree that, in
connection with any underwritten public offering, the Company also will enter
into customary contribution arrangements with the selling holders of
Registration Stock and the underwriters or broker-dealers through whom the
Registration Stock may be sold, with respect to situations in which
indemnification is potentially unavailable.
8.7 WITHDRAWAL. If a public offering is not completed within nine
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1(b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company reserves the right, at its option, to
withdraw from registration any securities offered by the Company which have not
been sold during such period, provided that no securities offered by any holder
of Registration Stock shall be withdrawn without the consent of the holders of
50% of the Registration Stock.
8.8 EXCHANGE ACT. As promptly as possible following receipt of a
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the Exchange Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on the Nasdaq National Market,
as requested, and shall keep effective such registration and maintain such
listing or inclusion, and shall use its best efforts timely to file such
information, documents and reports as the Securities and Exchange Commission may
require or prescribe that the Company file in connection therewith. The Company
will, at the request of any holder of Registration Stock, advise such holder in
writing as to whether all reports required to be filed by the Company under
Section 13 of the Exchange Act during the 12 months preceding such request (or
for such shorter period as the Company was required to file such reports) have
been filed, and any other information which the holder may reasonably require in
order to comply with Rule 144, or any other comparable rule, as then in effect.
9. EVENTS OF DEFAULT.
Each of the following shall constitute an Event of Default under this
Agreement:
9.1 DEFAULT ON PAYMENTS TO THE INVESTOR. The failure of the Company to
make (a) any principal or interest payment on the Debenture when due, or (b) any
other payment upon any other written obligation of the Company to the Investor
within 15 days after written
23
<PAGE>
notice from the Investor to the Company; regardless of whether any such failure
to make the payments described in (a) and (b) above is due to a legal inability
or the incapacity of the Company to make any such payments.
9.2 INFORMATION, REPRESENTATIONS AND WARRANTIES. Any information
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
9.3 COVENANTS AND AGREEMENTS. The failure of the Company to observe,
perform or abide by any other covenant, warranty, agreement or provision in any
of the Transaction Documents, which failure is not cured to the Investor's
reasonable satisfaction within 30 days after written notice from the Investor to
the Company of its occurrence; provided, however, that no Event of Default shall
be considered to have occurred if the failure is not the failure to pay money
and is of such a nature that it reasonably cannot be cured within the Cure
Period, but if it is curable and the Company in good faith begins efforts to
cure it within the Cure Period and continues diligently to do so, the Company
shall have an additional 30 days from the date on which the Cure Period ends to
effect the cure. If the failure continues after the expiration of such
additional 30 day period, regardless of whether such failure might be curable at
some time beyond such additional 30 day period, such failure shall nevertheless
be considered an Event of Default.
9.4 DEFAULT ON OTHER OBLIGATIONS. The occurrence of a material default
following the expiration of any applicable cure period, if any, in any material
obligation of the Company or any violation of law or refusal of regulatory
permission which has a material adverse effect on the Company's operations.
9.5 CERTAIN EVENTS AS TO THE COMPANY. The Company shall (A) admit in
writing its inability to pay its debts generally as they become due; (B) file a
petition or answer or consent seeking relief under the Federal Bankruptcy Code,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy or insolvency law or other similar law, not discharged or
vacated or set aside or stayed within 45 days; (C) consent to the institution of
proceedings under any law referenced in (B) above, not discharged or vacated or
set aside or stayed within 45 days, or to the filing of any such petition, not
discharged or vacated or set aside or stayed within 45 days or to the
appointment or taking possession of a receiver, liquidator, assignee, trustee,
custodian (or other similar official) of the Company or any subsidiary or of any
substantial part of their property; (D) fail generally to pay its debts as such
debts become due, or take corporate action in furtherance of any such action;
(E) make an assignment for the benefit of its creditors; or (F) fail to meet any
of its material monetary obligations; provided, however, that no Event of
Default shall be considered to have occurred under subsection 9.5(F) if the
failure to meet such material monetary obligations is due to a good faith
dispute between such parties, which dispute shall continue for no more than 30
days; provided, however, that upon the expiration of such 30 day period, the
Company shall have, upon notice to the Investor an additional 30 day period to
resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time
24
<PAGE>
beyond such additional 30 day period, such failure under subsection 9.5(F) shall
nevertheless be considered an Event of Default.
10. RIGHTS OF INVESTOR UPON DEFAULT.
10.1 RIGHTS ON DEFAULT. If there shall occur and be continuing an
Event of Default as defined in the foregoing Section 9, as long as the Debenture
is outstanding, the Investor may, by written notice to the Company, declare the
Company to be in default hereunder, whereupon, if the Investor so specifies in
such notice, the Debenture and all other indebtedness of the Company to the
Investor now or hereafter incurred, shall become immediately due and payable
without further demand, presentation or notice of any kind.
10.2 ADDITIONAL RIGHTS. The Investor shall have such additional
rights and remedies as are contained herein, in the Debenture, the Warrant, the
Class B Preferred Stock, or in any other documents and agreements delivered or
given in connection herewith, and all rights which it might have at law or
equity, all of which rights and remedies shall be cumulative.
11. LOCK-UP AGREEMENT. In the event that the Company determines to effect
an underwritten initial public offering, the Investor agrees that, for a period
of 180 days following the effective date of any registration filed in connection
therewith, the Investor will not directly or indirectly sell, transfer or
otherwise dispose of, any shares of Class B Preferred Stock, any shares of
Common Stock, or any right to acquire shares of Common Stock owned by the
Investor without the prior written consent of the underwriter(s) of such initial
public offering.
12. FURTHER ASSURANCE. The Company and the Investor agree to execute and
deliver all such other instruments and take all such other actions as any party
may reasonably request from time to time after the date hereof and without
payment of further consideration, in order to effectuate the transactions
provided for herein. The parties shall cooperate fully with each other and with
their respective counsel and accountants in connection with any steps required
to be taken as part of their respective obligations under this Agreement.
13. MISCELLANEOUS.
13.1 WAIVERS AND AMENDMENTS. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
13.2 GOVERNING LAW. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective representatives, successors and assigns.
25
<PAGE>
13.4 ENTIRE AGREEMENT. This Agreement and the other documents
delivered in connection with the transactions contemplated hereby or thereby
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and supersedes all prior
agreements, understandings, inducements or conditions, express or implied, oral
or written, except as herein or therein contained. The express terms hereof
control and supersede any course of performance and/or usage of trade
inconsistent with any of the terms hereof.
13.5 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly made and received when personally served, or when
mailed by first class mail or overnight, by courier service such as Federal
Express, postage prepaid, or telecopied with answer back receipt and hard copy
sent in the manner set forth above, addressed as set forth below:
(i) If to the Company, then to:
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, PA 19355
Telecopier No.: (610) 695-2592
Attn: President
with a copy, given in the manner prescribed above, to:
Cozen and O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
Telecopier No;: (215) 665-2013
Attn: Michael J. Heller, Esq.
(ii) If to the Investors, then to:
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
Telecopier No.:
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
13.6 PAYMENT OF EXPENSES. All reasonable legal fees and expenses
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof, not to exceed the aggregate amount
of $5,000, shall be paid by the Company from time to time promptly upon
submission of an invoice therefore.
26
<PAGE>
13.7 BROKERS. Each party represents that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement (other than Lehman Brothers Inc. ("Lehman Brothers")) and neither
party is under any obligation to pay any finder's or broker's fee in connection
herewith (other than 9% of the Purchase Price payable by the Company to Lehman
Brothers). Each party will indemnify, defend and hold the other party harmless
from any claim based on breach of this representation.
13.8 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing, and that all remedies, either
under this Agreement or by law or otherwise, shall be cumulative and not
alternative.
13.9 TITLES. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
13.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
13.11 EXECUTION; COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
13.12 EXHIBITS; SCHEDULES. All Exhibits and Schedules attached
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
QUADRANT INTERNATIONAL, INC.
By: /s/ Gregg W. Garnick
----------------------------------
Name: Gregg W. Garnick
Title: Chief Executive Officer
27
<PAGE>
SIGNATURE PAGE
(QI 6% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 31, 1998 AND WARRANT PURCHASE
AGREEMENT)
PURCHASER: John D. Macomber
Name: John D. Macomber
Signature: /s/ John D. Macomber
-------------------------------------
Title: _____________________________________
Address: 2806 N. Street NW
Washington, D.C. 20007
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
AGGREGATE SUBSCRIPTION AMOUNT: $250,000
Amount of Debenture: $250,000
Number of Warrants: 15,060
DATE: March 27, 1998
<PAGE>
SIGNATURE PAGE
(QI 6% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 31, 1998 AND WARRANT PURCHASE
AGREEMENT)
PURCHASER: John Akers
Name: John Akers
Signature: /s/ John Akers
-------------------------------------
Title: _____________________________________
Address: 290 Harbour Drive
Stamford, CT 06902
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
AGGREGATE SUBSCRIPTION AMOUNT: $250,000
Amount of Debenture: $250,000
Number of Warrants: 15,060
DATE:
<PAGE>
SIGNATURE PAGE
(QI 6% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 31, 1998 AND WARRANT PURCHASE
AGREEMENT)
PURCHASER: Samuel Frankel
Name: Samuel Frankel
Signature: /s/ Samuel Frankel
-------------------------------------
Title: _____________________________________
Address: 2301 West Big Beaver Road
Suite 900
Troy, MI 48084
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
AGGREGATE SUBSCRIPTION AMOUNT: $250,000
Amount of Debenture: $250,000
Number of Warrants: 15,060
DATE:
<PAGE>
EXHIBIT 4.13
SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT
------------------------------------------------
This AGREEMENT is entered into as of this 4th day of May, 1995, by and
among QUADRANT INTERNATIONAL INC., a Pennsylvania corporation with its principal
place of business at 170 Warner Road, Suite 102, Wayne, PA 19087 (the
"Company"), GREGG GARNICK, an individual (the "Founder") and NEPA VENTURE FUND
II, L.P., a Pennsylvania limited partnership with offices at 125 Goodman Drive,
Bethlehem, Pennsylvania 18015 (the "Investor").
In consideration of the mutual agreements, undertakings and covenants
herein contained, the parties, intending to be legally bound hereby, agree as
follows:
I. Purchase of Subordinated Notes and Warrants.
-------------------------------------------
1.1 Authorization of Subordinated Notes, Preferred Stock, Warrants
--------------------------------------------------------------
and Common Stock. The Company, before the Initial Closing as defined in Section
- -----------------
2.1 hereof, will have authorized the issuance and sale of up to $500,004.62 in
aggregate principal amount of its 9% subordinated notes (the "Notes") and the
issuance of up to three warrants (the "Warrants") to purchase an aggregate of up
to 119,584 shares of Class A Convertible Preferred Stock of the Company, par
value $.01 per share (the "Preferred Stock") to be issued upon exercise of the
Warrants upon the terms and conditions set forth in the Warrants and the
issuance of the Preferred Stock to be issued upon exercise of the Warrants. The
Preferred Stock in turn shall be convertible into shares of the common stock of
the Company, par value $.01 per share (the "Common Stock"), at the rates, and
otherwise shall have the designations, preferences, limitations, and rights,
provided for in the Amended and Restated Articles of Incorporation of the
Company (the "Amendment") in the form attached as Exhibit A hereto.
---------
1.2 Sale of Subordinated Notes. Subject to the terms and conditions
--------------------------
of this Agreement, the Company will issue and sell to the Investor, and the
Investor will purchase from the Company, Notes in an aggregate principal amount
of $500,004.62 (the "Purchase Price"). One Note, in the principal amount of
$300,001.10, shall be issued to the Investor by the Company and dated with the
date hereof as the date of issuance, with the full principal amount thereof
being payable and maturing on May 4, 2003, and bearing interest at the rate of
9% per annum from the date of issuance, which interest shall be payable, for the
first year after issuance, in arrears on the first anniversary of the issuance
of such Note, and thereafter, quarterly in arrears on the first day of August,
November, February and May, commencing August 1, 1996 and having the other terms
and conditions provided herein and in the form of Note attached hereto as
Exhibit B (the "Initial Note"). Either one or two other Notes shall be issued
- ---------
to the Investor by the Company pursuant to the terms and conditions hereof in a
principal amount of $200,003.52 (if one Note) or $100,001.76 (if two Notes),
being dated the date of issuance, with the full principal amount thereof being
payable and maturing on the eighth anniversary of the issuance of the Initial
Note (May 4, 2003), and bearing interest at the rate of 9% per annum from the
date of issuance, which interest shall be payable quarterly in arrears
commencing on the first day of the month after the month in which such
additional Note is issued, and having the other terms and conditions provided
herein and in the form of Note attached hereto as Exhibit C (collectively,
---------
"Subsequent Notes" and individually, a "Subsequent Note").
<PAGE>
1.3 Sale of Warrants. Subject to the terms and conditions of this
----------------
Agreement, the Company will issue and sell to the Investor, and the Investor
will purchase from the Company, as part of the consideration for the purchase of
the Notes and the payment of the Purchase Price, the Warrants, in the form of
the Warrant Certificate attached hereto as Exhibit D with respect to the
---------
issuance of the Initial Note (the "Initial Warrant"), or Exhibit E with respect
---------
to the issuance of any Subsequent Note (each such Warrant being hereinafter
referred to as a "Subsequent Warrant" and collectively as "Subsequent
Warrants"). The Warrants shall grant to the Investor the right to purchase an
aggregate of a maximum of 119,584 shares of Preferred Stock, at an exercise
price of $4.1812 per share, subject to adjustment as to such number of shares of
Preferred Stock and such exercise price upon achievement of the "Performance
Test Earnings Targets" (as defined below), all as provided in the Warrants. The
amount of shares of Preferred Stock issuable under each Warrant also shall be
reduced, and a portion of the shares of Preferred Stock and Common Stock
issuable thereunder shall be callable by the Company if the Warrant were to be
exercised on or before the date on which the Company is required, under Section
6.1(a), to deliver financial reports for the fiscal year ending December 31,
1997, depending on whether the Company achieves certain levels of earnings
before taxes for its combined fiscal years ended December 31, 1996 and 1997 (the
"Performance Test Earnings Targets"), all as more fully provided and set forth
in the Warrants.
1.4 Certain Terms. The shares of Preferred Stock issuable upon exercise
-------------
of the Warrants shall be hereinafter referred to as the "Warrant Shares." The
Warrants and the Warrant Shares shall be hereinafter collectively referred to as
the "Warrant Securities." The holders of the Warrants and/or the Warrant Shares
shall be hereinafter referred to as the "Holders of the Warrant Securities." The
holders of the Preferred Stock shall be hereinafter referred to as the "Holders
of the Preferred Stock." The shares of Common Stock issuable upon conversion of
the Preferred Stock shall hereinafter be referred to as the "Conversion Shares,"
and the Notes, the Warrants, the Common Stock, the Preferred Stock and the
Conversion Shares shall hereinafter collectively be referred to as the
"Securities."
II. Closing Date; Conditions to Closing; Deliveries.
-----------------------------------------------
2.1 Closing Dates.
-------------
(a) Initial Closing Date. An initial closing and the delivery of
--------------------
the Initial Note and the Initial Warrant related thereto shall be held on May 4,
1995, at the offices of Ballard Spahr Andrews & Ingersoll, 1735 Market Street,
51st Floor, Philadelphia, PA 19103-7599 ("Ballard"), concurrently with the
execution of this Agreement (the "Initial Closing"), or as soon as possible
after all of the conditions to the Initial Closing set forth in Section 2.2 of
this Agreement have been fulfilled, or at such time and place as the Company and
the Investor may agree. (The date of the Initial Closing is hereinafter referred
to as the "Initial Closing Date.")
(b) Subsequent Closings. Subsequent closings and deliveries of
-------------------
Subsequent Notes and Subsequent Warrants related thereto shall also be held at
the offices of Ballard, or at such other location as the parties may agree, upon
the fulfillment of the conditions associated with that particular subsequent
closing as set forth in Section 2.5 below.
2
<PAGE>
2.2 Conditions to Initial Closing. The Investor's obligation to
-----------------------------
close on the Initial Closing shall be subject to the fulfillment on or prior to
the Initial Closing Date of the following conditions:
(a) The representations and warranties made by the Company and
the Founder contained in this Agreement shall be true and correct when made, and
shall be true and correct on the Initial Closing Date with the same force and
effect as if they had been made on and as of the Initial Closing Date.
(b) The Company and the Founder shall have performed all
obligations and conditions herein required to be performed or observed by each
of them on or prior to the Initial Closing Date.
(c) The Investor shall have received from the Company and the
Founder all items required to be delivered pursuant to Section 2.3 of this
Agreement.
(d) The Company shall have obtained all consents, permits and
waivers deemed necessary or appropriate for the consummation of the transactions
contemplated by this Agreement, including, but not limited to, the requisite
approval of the Board of Directors and the shareholders of the Company of: (i)
this Agreement; (ii) the Amendment; (iii) the issuance of the Notes, the
Warrants, the Preferred Stock, the Conversion Shares and the other Securities;
and (iv) the consummation of all other transactions contemplated hereby.
(e) The Amendment shall have been filed with the proper offices
of the Secretary of the Commonwealth of the Commonwealth of Pennsylvania.
(f) An employment agreement, in the form of Exhibit F attached
---------
hereto (the "Employment Agreement"), shall have been executed and delivered by
and between the Company and the Founder.
(g) The Company shall have amended and restated its By-Laws, in
the form attached hereto as Exhibit G.
---------
(h) The Investor and all holders of Common Stock of the Company
shall have executed a Shareholders' Agreement (the "Shareholders' Agreement"),
in the form attached hereto as Exhibit H.
---------
(i) The Founder shall have voted his shares of Common Stock in
favor of one nominee to the Company's Board of Directors identified by the
Investor and such nominee shall have been elected as a director of the Company
(the "Designated Director").
(j) The Company shall have paid the Investor's legal fees and
disbursements of Investor's counsel related to this transaction, in the amount
indicated on bills presented to the Company at the Initial Closing, in an amount
not to exceed $15,000.
(k) The Founder shall have amended his personal bank line of
credit, promissory notes and all other agreements evidencing loans to the
Founder, the proceeds of which the Founder contributed to the Company, or shall
have made arrangements satisfactory to
3
<PAGE>
the Investor in its sole discretion that the Founder shall do so shortly after
the Initial Closing, such that upon repayment of such indebtedness of the
Founder by the Company through the use of a portion of the Purchase Price, which
the Investor hereby approves as an appropriate use of such proceeds, the Company
shall have available to it an equivalent line of credit from a commercial lender
and the Founder, if such lender requires, shall have guaranteed such line of
credit and pledged his personal assets as security for such guaranty.
(l) The Company shall have adopted an employee stock option plan
(the "ESOP"), in the form attached hereto as Exhibit I.
---------
(m) The Company shall have obtained, or made arrangements
satisfactory to the Investor for obtaining shortly after the Initial Closing,
"key-man" life insurance on the life of the Founder in the amount of $500,000,
with the Investor designated as beneficiary.
(n) A non-disclosure agreement, in the form attached hereto as
Exhibit J (the "Non-Disclosure Agreement"), shall have been executed and
- ---------
delivered to the Company prior to the Initial Closing by each current employee
of the Company other than the Founder.
2.3 Deliveries of the Company at the Initial Closing. The Company
------------------------------------------------
shall make the following deliveries to the Investor at the Initial Closing on
the Initial Closing Date.
(a) The Initial Note, executed by the Company in the form
attached as Exhibit B hereto, in the principal amount of $300,001.10, payable to
---------
the order of the Investor.
(b) The Initial Warrant, executed by the Company in the form
attached as Exhibit D hereto, to purchase an aggregate of 71,750 shares of the
---------
Preferred Stock, subject to certain adjustments set forth in the Initial
Warrant, registered in the name of the Investor.
(c) A copy of the Amendment, together with evidence sufficient
to satisfy the Investor that such Amendment was filed with the Secretary of
State of the Commonwealth of Pennsylvania on or prior to the date of the Initial
Closing.
(d) A certificate, executed by the President of the Company,
dated the Initial Closing Date, certifying to the fulfillment of the conditions
specified in Section 2.2 hereof (other than Section 2.2 (c)), and further
specifically certifying that there does not exist as of the Initial Closing Date
a state of facts that would constitute a default by the Company under any of the
terms, conditions or provisions of this Agreement, or an "Event of Default"
under any Note (collectively, all such defaults shall hereinafter be referred to
as "Defaults"), or which would, with notice or lapse of time, or both,
constitute such a Default (an "Impending Default"), and the Company is not in
default under the terms, conditions or provisions of its Articles of
Incorporation, as amended (including the Amendment), its By-laws, or any
indenture, mortgage or deed of trust or other material contract, agreement,
lease, instrument, court order, judgment, arbitration award, or decree to which
it is a party or by which it is bound or, which state of facts would, with
notice or lapse of time, or both, constitute such a default (collectively,
"Other Defaults").
4
<PAGE>
(e) Copies of resolutions adopted by the Board of Directors and
the shareholders of the Company authorizing and approving this Agreement, the
Amendment, the issuance of the Notes, the Preferred Stock, the issuance of the
Warrants and the other Securities and the consummation of all other transactions
contemplated hereby, as and to the extent required by applicable law, certified
by the Secretary of the Company.
(f) Copies of the Company's Articles of Incorporation (as
amended and restated by the Amendment) and By-laws (as amended and restated
pursuant to this Agreement) as then in effect, all certified by the Secretary of
the Company.
(g) The Employment Agreement, executed by the Founder.
(h) The Shareholders' Agreement, executed by each holder of
Common Stock of the Company.
(i) The Non-Disclosure Agreements, executed by each employee of
the Company other than the Founder.
(j) A Good Standing Certificate for the Company issued by the
Secretary of State of the Commonwealth of Pennsylvania, dated within 15 days
prior to the Initial Closing Date.
(k) An opinion letter, from Cozen & O'Connor, counsel to the
Company, addressed to the Investor, dated the Initial Closing Date, in the form
of Exhibit K attached hereto.
---------
(l) A certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of the Company's officers
and directors.
2.4 Deliveries of the Investor at the Initial Closing. The Investor
-------------------------------------------------
shall deliver to the Company at the Initial Closing on the Initial Closing Date
a certified or bank check or wire transfer in the amount of $300,001.10;
provided that the conditions contained in Section 2.2 hereof have been
- --------
fulfilled, and the deliveries required to be made under Section 2.3 hereof have
been made. The Investor acknowledges that a portion of such amount will be used
to repay the Founder's personal bank line of credit, promissory notes and all
other loans to the Founder in an aggregate amount of $90,000 and the proceeds of
which the Founder contributed to the Company, as described in Section 2.2(k).
2.5 Subsequent Closings. The balance of the Purchase Price shall be
-------------------
paid by the Investor, and the Subsequent Notes shall be issued by the Company,
at subsequent closings (each being a "Subsequent Closing"). A Subsequent
Closing shall occur at one or two subsequent dates (each being a "Subsequent
Closing Date"), if and when the particular conditions attached to the occurrence
of such Subsequent Closing have been fulfilled. In no event shall the Investor
be under any obligation to pay any portion of the Purchase Price to the Company
if the Company fails to fulfill the conditions attached thereto. The Investor
may, however, at its option, waive any of the conditions to any such Subsequent
Closing and proceed to closing, and become entitled to the applicable Subsequent
Note and Subsequent Warrant, upon payment of the applicable portion of the
Purchase Price. In addition, unless the particular
5
<PAGE>
condition required for a particular Subsequent Closing is waived, no Subsequent
Closing shall occur until (a) the Company will have provided the Investor with
not less than five business days prior written notice of the applicable
Subsequent Closing Date, which shall be no later than May 4, 1998; (b) the
Company shall have requested from the Investor payment of a portion of the
Purchase Price equal to $100,001.76 or $200,003.52, as applicable; and (c) the
Investor shall have received from the Company a certificate executed by the
President of the Company, on behalf of the Company, certifying and attesting
that, as of the time of the Subsequent Closing, (i) all obligations, conditions
and deliveries required to have been performed, observed or made by the Company
under Sections 2.2 and 2.3 as to the Initial Closing and 2.5 as to the
Subsequent Closing shall have been so performed, observed or made or the
Investor shall have waived the same; and (ii) that, as of such time, there does
not exist any state of facts that would constitute a Default, an Impending
Default or an Other Default. At each Subsequent Closing, the Company shall issue
a Subsequent Note and a Subsequent Warrant to the Investor, in the forms
attached as Exhibit C and Exhibit E hereto, respectively, with the Subsequent
--------- ---------
Note being in a principal amount equal to $100,001.76 or $200,003.52, as
applicable, against receipt of the same from the Investor and the Subsequent
Warrant shall be registered in the name of the Investor and provide the Investor
with the right to purchase an aggregate of 23,917 or 47,834 shares of Preferred
Stock, as applicable, subject to certain adjustments set forth in the Subsequent
Warrant.
III. Representations and Warranties of the Company and the Founder. As of
-------------------------------------------------------------
the date of this Agreement, except as set forth and identified to a specific
section number on the Schedules attached hereto setting forth the specific
exceptions to the specific sections of this Article 3, each of the Company and
the Founder represents and warrants, jointly and severally, to the Investor
(regardless of any investigation made or information obtained by the Investor),
as a material inducement to enter into this Agreement, as follows; provided;
--------
however, that where a representation or warranty in this Article 3 is limited as
- -------
to the knowledge of the Company or of the Founder, no liability shall arise to
the Company or the Founder, as applicable, for any breach of such representation
or warranty, unless knowledge of the misrepresentation or breach by the Company
or Founder can be demonstrated, notwithstanding that the representations and
warranties in this Article 3 are otherwise made jointly and severally by the
Company and the Founder:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. The Company has all requisite corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted. As listed on Schedule 3.1 attached hereto, the Company is
------------
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
Company. The minute books and stock records of the Company are complete and
accurate in all material respects and all signatures included therein are the
genuine signatures of the persons whose signatures are required.
3.2 Subsidiaries, etc. The Company has no subsidiaries and does not
------------------
own any capital stock, security, partnership interest or other interest of any
kind in any corporation, partnership, joint venture, association or other
entity.
6
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3.3 Capitalization. As of the date of this Agreement, upon filing
--------------
the Amendment, the Company's authorized capital stock consists of (a) 4,000,000
shares of Common Stock, of which 221,026 shares are outstanding, 6,185 shares
are reserved for issuance under an option granted to Mike Harris, one of the
former principals of Checkmate Technologies, Inc. ("Checkmate") and now an
employee of the Company, as a form of incentive (the "Harris Options") and
37,024 shares (the "Original ESOP Amount") are reserved for issuance under
options or stock grants issued pursuant to and under the terms of the ESOP to
Company employees and other persons eligible under the ESOP to be granted such
options, which original ESOP Amount may be decreased by the Harris Options down
to a total of 30,839 shares reserved for issuance under the ESOP if and to the
extent that incentive milestones in the Harris Options are not met or waived and
all or any portion of the Harris options expire unexercised (the "Decreased ESOP
Amount") and (b) 119,584 shares of Preferred Stock, of which no shares are
outstanding and all of which are reserved for issuance upon exercise of all of
the Warrants, subject to adjustment as to such number of shares of Preferred
Stock in certain circumstances, as provided in the Warrants. Unless the
Investor or the Designated Director otherwise consents, prior to the issuance of
the Preferred Stock upon exercise of the Warrants issued under this Agreement,
no shares of any class or series of Preferred Stock or any other capital stock
other than the Common Stock will be issued or outstanding. There are no
treasury shares held by the Company. All outstanding shares of capital stock
are, and the Securities, when issued in accordance with or as contemplated by
the terms of this Agreement, will be, validly issued and outstanding, fully paid
and non-assessable. The Warrant Shares and the Conversion Shares have been duly
and validly authorized and reserved for issuance. Other than the shares
issuable under the ESOP and the Harris Options, no subscription, warrant, option
or other right or commitment to purchase or acquire from the Company any shares
of any class or series of capital stock of the Company, or any other securities
of the Company, is authorized or outstanding. A current shareholders' list
giving the names, addresses and number of shares owned by each shareholder of
the Company is attached hereto as Schedule 3.3.
------------
3.4 Authorization. The Company has all necessary corporate power to
-------------
enter into this Agreement, to issue and deliver the Securities to be issued
hereunder, and to carry out all of the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby, including, without
limitation, the issuance of the Notes, the Preferred Stock, the Warrants and the
other Securities to be issued hereunder or under the terms of the Warrants or
the Preferred Stock, have been duly authorized by all requisite corporate action
on the part of the Company and by all requisite shareholder action on the part
of the Company's shareholders. This Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
3.5 Contracts, Leases, Agreements and Other Commitments. Except as
---------------------------------------------------
described on Schedule 3.5 and, as to the Founder, limited to the best of the
------------
Founder's knowledge, the Company is not a party to or bound by any written, oral
or implied contract, agreement, lease, power of attorney, guaranty, surety
arrangement, or other commitment, in excess of $10,000, including, but not
limited to, any contract or agreement for the purchase or sale of merchandise or
for the rendition of services.
7
<PAGE>
3.6 Breach. The Company is not in violation or breach of any of the
------
terms, conditions or provisions of its Articles of Incorporation, as amended
(including the Amendment), its By-laws (as amended pursuant to this Agreement),
or in material violation or material breach of any indenture, mortgage or deed
of trust or other material contract, agreement, lease, instrument, court order,
judgment, arbitration award, or decree to which it is a party or by which it is
bound.
3.7 Employees, Officers, and Directors. A current list of the names
----------------------------------
and addresses of all officers and directors of the Company is attached hereto as
Schedule 3.7. Except as described on Schedule 3.7, and, as to the Founder, to
- ------------ ------------
the best of the Founder's knowledge, the Company has not entered into any
agreements with any of its employees, officers, or directors, or any of its
former employees, officers, or directors.
3.8 Compliance with Laws. Except as described in Schedule 3.8, and,
-------------------- ------------
as to the Founder, limited to the best of the Founder's knowledge, the Company
is in compliance with all existing requirements of laws, Federal, state, local,
and foreign, and all existing requirements of all governmental bodies or
agencies having jurisdiction over it, the failure to comply with which might
have a material adverse effect on the Company.
3.9 Conflict with Documents. Neither the execution, delivery and
-----------------------
performance of this Agreement by the Company, nor the consummation of the
transactions contemplated hereby, either immediately or with the passage of time
or the giving of notice or both, will:
(a) Conflict with or cause a breach or default under any of the
terms, conditions or provisions of, result in a termination or modification of,
or cause any acceleration of any obligation of the Company under any material
contract, lease or other instrument to which the Company is bound or by which
any of the Company's properties or assets may be affected;
(b) Conflict with the provisions of the Company's Articles of
Incorporation, as amended (including the Amendment), By-laws (as amended
pursuant to this Agreement) or any statute, law, rule or regulation or any
order, judgment or decree to which the Company or any of its properties or
assets are subject; or
(c) Result in the creation or imposition of any lien, charge or
encumbrance against the Company or any of the Company's material properties or
assets.
3.10 Financial Statements. The Company has furnished to the
--------------------
Investor a copy of its unaudited internally prepared balance sheet as of March
31, 1995 and the corresponding statements of income, retained earnings and
changes in financial position for the periods therein specified, a copy of which
is attached hereto as Exhibit L. As to the Founder, limited to the best of the
---------
Founder's knowledge, the unaudited financial statements referred to above are
correct, are in accordance with the Company's books and records and present
fairly, in all material respects, the Company's financial position at March 31,
1995, and the results of its operations and financial condition for the period
therein specified, subject to normal recurring adjustments.
3.11 Taxes. The Company has filed all applicable Federal, state,
-----
local and foreign tax returns required to be filed to date, in accordance with
the provisions of law
8
<PAGE>
pertaining thereto, and has paid all taxes, interest, penalties and assessments
required to have been paid to date. The Company has not been advised that any of
its returns, federal, state, local or foreign, have been or are being audited as
of the date hereof.
3.12 Litigation. As to the Founder, limited to the best of the
----------
Founder's knowledge, there are no pending suits, legal proceedings, claims or
governmental investigations against or with respect to the Company or its
directors or officers, or its properties or assets, nor, to the best of the
knowledge of the Company and the Founder, is any such suit, legal proceeding,
claim or governmental investigation threatened nor, to the best of the knowledge
of the Company and the Founder, is there any basis for any such suit, legal
proceeding, claim or governmental investigation.
3.13 Intangible Property. Except as set forth on Schedule 3.13 and,
------------------- -------------
as to the Founder, limited to the best of the Founder's knowledge, the Company
has all right, title and interest in and to all intangible property and
technology, and to the best of the knowledge of the Company and the Founder, all
permits, licenses and other authority, necessary to the conduct of its business
as presently constituted and conducted, and as proposed to be constituted and
conducted.
3.14 Trademarks, Patents, etc. The corporate names of the Company,
-------------------------
and the trade names, trademarks, and service marks listed on Schedule 3.14 are
-------------
the only names and marks which are used by the Company in the operation of its
business. No claim has been asserted against the Company involving any conflict
or claim of conflict of its trade names, trademarks or service marks or with the
trade names, trademarks, service marks or corporate names of others, and, to the
best of the knowledge of the Company and the Founder and except as set forth on
Schedule 3.14, there is no basis for any such claim of conflict. Except as set
- -------------
forth on Schedule 3.14 and to the best of the knowledge of the Company and the
-------------
Founder, the Company is the sole and exclusive owner of its trade names,
trademarks and service marks and has the sole and exclusive right to use such
trade names, trademarks and service marks. The Company is the registered owner
of the United States and foreign patents listed on Schedule 3.14 and has
-------------
applications pending with the U.S. Patent Office and/or foreign patent offices
for the patents listed on Schedule 3.14 as being patents pending. The Company
-------------
has no knowledge of any adverse claim of any kind with respect to any of such
patents or patent applications, nor does it have any knowledge, or reason to
know, that a patent will not issue on any such patent application. Except as
set forth on Schedule 3.14 and to the best of the knowledge of the Company and
-------------
the Founder, no process used by the Company or any product manufactured or sold
by the Company infringes upon any patent, patent application, trademark, trade
name or service mark of any other party. To the best of the knowledge of the
Company and the Founder and except as set forth on Schedule 3.14, the Company is
-------------
not infringing, and there has been no claim of infringement of, any third
party's patent, license, trademark, trade name, service mark, copyright or other
proprietary right.
3.15 Insurance. The Company maintains insurance on all of its
---------
insurable properties as listed on Schedule 3.15 attached hereto. As to the
-------------
Founder, limited to the best of the Founder's knowledge, all such insurance
policies are in full force and effect and the Company is not in default of any
provision thereof. The Company has not received notice from
9
<PAGE>
any issuer of any such insurance policies of its intention to cancel or refusal
to renew any policy issued by it.
3.16 Governmental Consent. As to the Founder, limited to the best
--------------------
of the Founder's knowledge, no permit, consent, approval or authorization of, or
filing with, any governmental regulatory authority or agency is required of the
Company in connection with the execution, delivery and performance of this
Agreement, or the consummation of the transactions contemplated hereby, except
as may be required by any federal or state securities laws, with which the
Company will comply.
3.17 Liabilities. As to the Founder, limited to the best of the
-----------
Founder's knowledge, the Company has no liabilities, whether related to tax or
non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, or otherwise, except: (a) as provided on
Schedule 3.17; (b) liabilities not in excess of $10,000 individually or $25,000
- -------------
in the aggregate, that have been incurred in the ordinary course of business;
(c) legal and accounting expenses incurred in connection with this Agreement in
an aggregate amount estimated to be not in excess of $30,000; or (d) liabilities
which appear on the Company's balance sheet as of March 31, 1995, which is
attached hereto as Exhibit J.
---------
3.18 Assets. The company has good and marketable title to all of
------
its assets free and clear of all liens, charges, claims, encumbrances and
defects of any kind or character, except as set forth on Schedule 3.18 with
-------------
respect to encumbrances (a) to be placed on such assets in connection with the
Company becoming liable for and repaying the Founder's bank indebtedness upon
receipt of a line of credit, all as described in Section 2.2(k) or (b) which do
not encumber any material asset of the Company (collectively, "Permitted
Liens"). To the best of the knowledge of the Company, as to which the Founder
makes no representation or warranty, all equipment, furniture and fixtures, and
other tangible personal property of the Company are in good operating condition
and repair and do not currently require any repairs other than normal routine
maintenance to maintain such property in good operating condition and repair.
3.19 Conflicting Interests. Except as set forth on Schedule 3.19 or
--------------------- -------------
Exhibit L, neither the Founder, nor as to the Founder, limited to the best of
- ---------
the Founder's knowledge any other director, officer, or any relative or
affiliate of any director or officer, nor, to the best of the knowledge of the
Company and the Founder, any employee or shareholder of the Company or any
relative or affiliate of any of the employees or shareholders (a) has any
pecuniary interest in any supplier or customer of the Company or in any other
business enterprise with which the Company conducts business or with which the
Company is in competition; or (b) is indebted to the Company for money borrowed.
3.20 No Payments to Shareholders or Others. Except as set forth on
-------------------------------------
Schedule 3.20 and, as to the Founder, limited to the best of the Founder's
- -------------
knowledge, there has not been any purchase or redemption of any shares of stock
of the Company by the Company or any transfer, distribution or payment by it,
directly or indirectly, of any money or other property or assets to any
shareholder or to any other person, other than (i) payment of compensation for
services actually rendered at rates not in excess of the rates prevailing on the
Initial Closing Date, increases in compensation for Company executive officers
and other key employees, as determined by the Compensation Committee, and as to
other employees, as determined by the
10
<PAGE>
President of the Company, (ii) payments made in the ordinary course of business
for goods and services in arm's length transactions and (iii) payments on the
Founder's bank indebtedness to be made as described in Section 2.2(k).
3.21 Absence of Material Changes. Since March 31, 1995:
---------------------------
(A) There has not been and there is not threatened any material
adverse change in the financial condition, business, prospects or affairs of the
Company or any material physical damage or loss to any of its properties or
assets or to the premises occupied by it (whether or not such damage or loss is
covered by insurance);
(B) The Company has not taken any action outside of the
ordinary and usual course of its business, except as related to the transactions
contemplated hereby;
(C) The Company has not borrowed any money or become
contingently liable for any obligation or liability of others;
(D) The Company has paid all of its debts and obligations as
they became due;
(E) Except as set forth in Schedule 3.21E attached hereto and
--------------
except for the Notes to be issued hereunder, the Company has not incurred any
debt, liability or obligation of any nature to any party, except for becoming
liable on the indebtedness of the Founder described in Section 2.2(k), or
obligations arising from the purchase of goods or the rendition of services in
the ordinary course of business;
(F) The Company has not knowingly waived any right of
substantial value;
(G) The Company has maintained its books, accounts and records
in the usual, customary and ordinary manner; and
(H) The Company has used its best efforts to preserve its
business organization intact, to keep available the services of its employees,
and to preserve its relationships with its customers, suppliers and others with
whom it deals.
3.22 Acquisition of Checkmate. Except as set forth in the Agreement
------------------------
in Principle regarding the Purchase of Assets of Checkmate Technologies, Inc.,
dated as of May 2, 1994, and as to the Founder, limited to the best of the
Founder's knowledge, the Company's acquisition of all or substantially all of
the assets of Checkmate has been consummated and in full force and effect, with
no shareholders of either the Company or Checkmate dissenting, and all of the
assets, rights, privileges, powers and franchises of Checkmate and all property,
real, personal and mixed, of Checkmate are vested in and are the property of the
Company, free and clear of any encumbrances upon their transfer from Checkmate
to the Company and no creditor of Checkmate has made or is threatening to make
any claim of any kind against the Company or any of its assets that formerly
were assets of Checkmate.
11
<PAGE>
3.23 Statements and Other Documents Not Misleading. No provision of
---------------------------------------------
this Agreement relating to the Company or any other document, schedule, exhibit
or other information furnished by the Company to the Investor in connection with
the execution, delivery and performance of this Agreement, or the consummation
of the transactions contemplated hereby, when taken together as a whole with all
other such statements, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact required to be
stated in order to make the statement, in light of the circumstances in which it
is made, not misleading.
IV. Representations and Warranties of Investor and Restrictions on
--------------------------------------------------------------
Transfer.
- --------
4.1 Representations and Warranties by the Investor. The Investor
----------------------------------------------
represents and warrants to the Company as follows:
(a) The Investor is acquiring the Securities for investment for
its own accounts and not with a view to, or for resale in connection with, any
distribution of the Securities. The Investor understands that the Securities
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or under any state securities or Blue Sky laws, and, as a
result thereof, are subject to substantial restrictions on transfer. The
Investor acknowledges that the Securities must be held indefinitely unless
subsequently registered under the Securities Act and any applicable state
securities or Blue Sky laws, or exemptions from registration under the
Securities Act and such laws are available.
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes a valid and legally binding obligation of the Investor,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors, rights and to general equity principles.
(c) The Investor is domiciled in Pennsylvania, is a Pennsylvania
limited partnership and is an "accredited investor," as that term is defined in
Rule 501 of the Securities Act.
(d) The Investor is an "institutional investor," as that term is
defined in Regulation (S) 102.111 of the Pennsylvania Securities Act of 1972
(the "PA Securities Act"), and, accordingly, the offer and sale of the
Securities to the Investor is an exempt transaction pursuant to (S) 203(c) of
the PA Securities Act.
4.2 Legends. Each certificate or instrument representing the
-------
Securities shall be endorsed with the following legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SUCH ACT AND SUCH LAWS.
12
<PAGE>
V. Continuation and Survival of Representations and Warranties. All
-----------------------------------------------------------
representations and warranties shall survive the consummation of the
transactions provided for in this Agreement for a period equal beginning on the
date hereof up to and including November 4, 1997 (thirty (30) months from the
date of this Agreement). No such representation or warranty shall be deemed to
have been waived, affected or impaired by any investigation made by any person
or persons.
VI. Affirmative Covenants of the Company and the Founder. Until the first
----------------------------------------------------
to occur of either (a) the Investor no longer owning at least 7.5% or more of
the Common Stock outstanding (assuming the exercise of the Warrants, the Harris
Options and all options with respect to all shares issuable under the ESOP and
the conversion of the Preferred Stock) (the "Minimum Stock Amount") or (b) the
consummation of a public offering of any of the Securities pursuant to one or
more registration statements filed under the Securities Act (or any successor
statute), yielding gross proceeds to the Company of at least $7,500,000 and
under which the Common Stock equivalents into which the Preferred Stock is
convertible are valued at a price of at least 500% of the "stated value" of the
Preferred Stock, as defined in the Amendment, after all dilution adjustments
(determined by such a registration statement or statements being declared
effective by the Securities and Exchange Commission, such Securities being
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (regardless whether the Company is subject to the filing
requirements of Section 15(d) of the Exchange Act) and such securities being
listed on a national stock exchange or included for quotation on the Nasdaq
National Market) (a "Qualifying Public Offering"), the Company hereby covenants
(and with respect to Section 6.2, the Founder hereby covenants) to comply with
the following affirmative covenants, unless waived by the Investor, if no shares
of Preferred Stock are then outstanding, or if shares of Preferred Stock are
then outstanding, by Holders of at least three-fourths of the Preferred Stock
(with each holder of Preferred Stock entitled to that number of votes equal to
the Conversion Shares into which the Preferred Stock is convertible) and
Conversion Shares then outstanding, acting as a single class (the Investor
and/or such holders being the "Required Holders"):
6.1 Financial Statements. The Company shall furnish to the Investor
--------------------
and any other Holder of Preferred Stock the following financial statements,
reports and other documents, such financial statements to be prepared in
accordance with generally accepted accounting principles consistently applied,
certified by the Company's chief executive or financial officer:
(a) Beginning with the end of the Company's 1995 fiscal year, as
soon as available, and in any event within 90 days after the end of each fiscal
year of the Company, a balance sheet of the Company as of the end of such fiscal
year and related statements of operations, shareholders' equity and cash flows
for such fiscal year, all in reasonable detail and setting forth in comparative
form the figures as of the end of and for the previous fiscal year, which
financial statements shall have been audited, and shall be accompanied by an
unqualified opinion addressed to the Company from "Big Six" independent auditors
or other independent auditors that are reasonably satisfactory to the Investor,
together with a copy of such auditors' letter to Company management.
(b) As soon as available, and in any event within 20 days after
the end of each month, and within 30 days after the end of each fiscal quarter
and year of the Company,
13
<PAGE>
an unaudited balance sheet and unaudited statements of operations, shareholders'
equity and cash flows, together with a comparison of such financial statements
with the budget of the Company for such period.
(c) As soon as available, and in any event at least 60 days
prior to the end of each fiscal year of the Company, an annual budget and
business plan for the subsequent fiscal year, which budget and business plan
shall include a monthly breakdown of financial statements, which breakdown shall
include the underlying assumptions and a brief qualitative description of the
Company's plan by the Company's Chief Executive Officer in support of such
budget and business plan, which also shall have been approved and accepted by
the Board of Directors of the Company. If during the course of operations for
any such month it becomes apparent that deviations from such financial
statements, budget and business plan have occurred, the Company shall submit to
its Board of Directors a statement of such deviation within five business days
from the date of the Company's knowledge of such deviation (the "Statement").
The Statement shall detail the manner in which a new financial projection
deviates from the annual business plan and the reason therefor. The Board of
Directors shall have the right to ask questions or request any other reasonable
additional information with respect to the Statement. Any and all subsequent
deviations from such financial statements shall be resubmitted to the Board of
Directors of the Company for approval and acceptance or for required further
revision until such approval and acceptance is obtained.
(d) In the event that the Company at any time hereafter shall be
required, by law or by generally accepted accounting principles, to consolidate
its financial statements with those of a subsidiary corporation, the Company
shall thereafter furnish the financial statements required by this Section 6.1
on a consolidated basis, and the quarterly and annual financial statements
specified above shall be furnished with consolidating financial statements.
6.2 Board of Directors; Meetings. The Company shall maintain By-law
----------------------------
provisions satisfactory to the Investor in its sole discretion with respect to
the following provisions:
(a) Subject to the terms of the Amendment and this Agreement and
except as the By-Laws provide otherwise, the Board of Directors of the Company
shall consist of not less than two and not more than five members, of which the
holders of Preferred Stock, until such time as all shares of Preferred Stock
have been converted into shares of Common Stock and a Qualifying Public Offering
has occurred, shall have the right to elect one member, or if there are then no
holders of Preferred Stock, until such time as a Qualifying Public Offering has
occurred, the Founder shall vote his shares of Common Stock in favor of one
nominee for director nominated by the Investor. As of the date hereof, the
directors elected by the holders of the Common Stock shall be the Founder,
Richard S. Garnick and Frederick J. Beste III (who has been nominated by the
Investor).
(b) The Company shall permit the Designated Director to invite
one or more additional individuals to any and all meetings of the Board of
Directors or of the shareholders of the Company; provided, however, that the
-------- -------
individual invited must be a director, officer, consultant or employee of the
Investor. Such individuals may participate in discussions
14
<PAGE>
and express their views on matters before the Board, but shall not be entitled
to vote. Such attendance may be either in person or by telephone.
(c) The Company shall establish a Compensation Committee of the
Board of Directors, consisting of not less than two and not more than three
members, of which one shall be a Board member elected by the Holders of the
Preferred Stock, or if there are then no such Holders, the Founder shall vote
his shares in favor of a nominee for such Committee identified and nominated by
the Investor. The Compensation Committee shall review and approve all employee
compensation policies and programs and shall approve the initial and future
compensation of all executive officers and other key employees of the Company.
To the extent the Board of Directors establishes any other committees, one
member of any such committee shall be a Board member elected by the Holders of
the Preferred Stock or, if there are then no such Holders, the Founder shall
vote in favor of a nominee for such Committee as identified and nominated by the
Investor.
6.3 Additional Information.
----------------------
(a) The Company shall, as promptly as possible (but, in any
event, within ten days) after obtaining knowledge of the occurrence of any
"Default," as such term is defined in Section 2.3(d) above), or any other
material adverse development or event, furnish the Investor with a detailed
written notice of such default or event and the proposed response of Company
management.
(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish the Investor
with notice of all material actions, suits and proceedings before any court or
governmental agency, commission, board, bureau, department or instrumentality,
domestic or foreign, affecting the Company.
(c) The Company shall promptly furnish the Investor with all
notices for and minutes of meetings of the shareholders and/or directors of the
Company, and all written consents taken by the shareholders and/or directors of
the Company.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the same,
furnish the Investor with all reports and financial statements that the Company
shall send or make available to the shareholders or the directors of the Company
or the Securities and Exchange Commission.
(e) The Company shall, as promptly as possible (but, in any
event, within ten days) after the occurrence thereof, furnish the Designated
Director with prompt written notice of all material developments and
transactions outside of the ordinary course of business or which might otherwise
have a significant effect on the Company's business prospects or financial
condition or on the Investor's investment in the Securities.
(f) The Company shall furnish the Investor with such other
information with respect to the business, properties, assets, or the condition
of operations, financial or otherwise, of the Company as the Investor may, from
time to time, reasonably request.
15
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(g) The Investor agrees not to disclose to third parties any
confidential information concerning the Company which is furnished to the
Investor by the Company except as required by law, legal process or its
fiduciary duty to report financial and business information to its partners,
shareholders, directors or affiliates and to such other persons as the Investor,
in the exercise of its prudent business judgment, may select and shall use
reasonable commercial efforts to have such persons maintain such confidentiality
of the confidential information. The term "confidential information" does not
include information which (i) was or becomes generally available to the public
other than as a result of a disclosure by the Investor, or (ii) was or becomes
available to the Investor on a non-confidential basis from a source other than
the Company, provided that such source is not bound by a confidentiality
agreement with the Company.
6.4 Inspection. The Company shall permit, at any reasonable time and
----------
from time to time upon reasonable advance notice, the Investor or its duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's records, books of account, documents and other materials, to
visit its properties, and to discuss the affairs, finances and accounts of the
Company with any of the Company's officers, consultants, directors or
independent accountants.
6.5 Life Insurance. The Company shall, within 30 days of the Initial
--------------
Closing Date, apply for, and within 45 days of the Initial Closing Date purchase
and maintain at its expense, a key man life insurance policy or policies, with
an insurance company or association satisfactory to the Investor, on the life of
the Founder, in the amount of $500,000, payable to the Investor, which amount
shall not be decreased or cancellable other than due to the non-payment of
premiums or prior repayment of the Notes. Assuming issuance of such a life
insurance policy as to which the Investor is the beneficiary, upon the death of
the Founder, the Investor shall accelerate all of the Notes it then holds and
the proceeds of such policy shall be used to repay all then outstanding
principal and interest under the Notes. To the extent the proceeds of such life
insurance policy exceed all amounts due under the Notes, the Investor shall
remit to the Company such excess remaining after all amounts due on the Notes
have been fully satisfied.
6.6 Compliance with Articles of Incorporation and By-laws. The
-----------------------------------------------------
Company shall perform and observe all the obligations and provisions set forth
in its Articles of Incorporation (including the Amendment) and By-laws.
6.7 Maintain Rights and Facilities. The Company shall maintain and
------------------------------
preserve its corporate existence and all permits, rights and franchises
necessary to the conduct of its business in full force and effect and adequate
for its business as presently conducted and proposed to be conducted. The
Company shall maintain complete and exclusive ownership of, but shall have the
right to license or sublicense, its patents, trademarks, trade names, service
marks, and other proprietary rights.
6.8 Books and Records. The Company shall make and keep books,
-----------------
records and accounts, which, in reasonable detail, accurately and fairly reflect
its transactions, and shall devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (a) transactions are
executed in accordance with management's general or specific authorization; (b)
transactions are recorded as necessary to permit preparation of the
16
<PAGE>
financial statements required herein and to maintain accountability for assets;
and (c) access to assets is permitted only in accordance with management's
general or specific instructions and recorded assets are compared with existing
assets at reasonable intervals and appropriate action is taken with respect to
any difference.
6.9 Other Insurance. The Company shall maintain insurance against
---------------
such risks and in at least such amounts as is customarily carried by companies
engaged in the same or a similar business, under valid and enforceable policies
issued by insurers of recognized responsibility.
6.10 Contracts and Agreements. The Company shall comply in all
------------------------
material respects with the provisions of all material contracts, indentures,
instruments and agreements to which it is a party or by which the Company or its
properties are bound, and with all other material obligations which the Company
incurs or to which it becomes subject.
6.11 Taxes. The Company shall pay and discharge when due all
-----
federal, state, local, and foreign taxes, assessments, penalties, interest and
governmental charges which become payable by the Company or which shall be
imposed upon its properties, and all claims for labor, materials or supplies
which if unpaid might by law become a lien upon any of its properties; provided,
--------
however, that the Company may in good faith contest any tax, assessment,
- -------
penalty, or charge, provided that such contest is asserted in accordance with
applicable procedures.
6.12 Compliance with Laws. The Company shall comply with all laws,
--------------------
rules and regulations of all governmental authorities and agencies applicable to
the Company, its business or its properties, the failure to comply with which
might have a material adverse effect on the Company.
VII. Negative Covenants. The Company hereby covenants that, until the
------------------
first to occur of (a) the Investor no longer owning the Minimum Stock Amount and
(b) the consummation of a Qualifying Public Offering, the Company shall comply
with the following negative covenants unless such covenant is waived by the
Required Holders:
7.1 Conduct of Business. The Company shall not:
-------------------
(a) (i) Merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other corporation or other
entity or entities; (ii) reorganize, dissolve or liquidate the Company, or adopt
any plan of reorganization, dissolution or liquidation of the Company; (iii)
sell, assign or otherwise dispose of all or any substantial portion of its
assets; or (iv) acquire all or any substantial portion of the voting stock or
assets of another corporation or other entity or entities;
(b) Except as otherwise required or permitted by this Agreement
(including Section 7.11), create, authorize or issue any additional shares of
capital stock (other than shares issuable upon exercise of options issued under
the ESOP, the Harris Options), or any rights to acquire any shares of capital
stock or any other security; or repurchase any shares of its capital stock
except from employees upon termination of employment or pursuant to or as
permitted by the Shareholders' Agreement.
17
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(c) Amend its Articles of Incorporation (including the
Amendment) or By-laws.
(d) Effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the conduct of
the business of the Company, as such business is conducted and proposed to be
conducted.
7.2 Liens and Encumbrances. Except for Permitted Liens (as defined
----------------------
in Section 3.18), the Company shall not create, assume, or permit to exist any
lien, security interest, pledge or other encumbrance, under conditional or
installment sale arrangements or otherwise, with respect to its properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent. This Section 7.2 may be waived by
action of the Board of Directors, without the consent of the Required Holders,
provided that the Designated Director is included in the majority of directors
voting to permit such waiver.
7.3 Dividends. The Company shall not declare or pay any dividend
---------
payable in cash or other property or make or authorize any other distribution,
directly or indirectly, on any class of the Company's capital stock or redeem or
purchase any of the securities of the Company, other than the Preferred Stock
issued upon exercise of the Warrants issued hereunder or as permitted by the
Amendment with respect to payment of dividends on the Preferred Stock and the
Common Stock or as permitted by the Notes or as contemplated by the
Shareholders' Agreement.
7.4 Agreements. The Company shall not enter into any contract,
----------
agreement, lease or other instrument which, by its terms, restricts, in any
material respect, the Company's ability to make payment on the Notes or to
redeem shares of the Preferred Stock, or which otherwise restricts, in any
material respect, the Company's ability to perform under this Agreement.
7.5 Insider Transactions. The Company shall not enter into any
--------------------
transaction with any of its officers, directors or shareholders, except for the
Employment Agreement and the Shareholders' Agreement, and other employment
related transactions on reasonable and customary terms, unless: (a) such
transaction is an arm's-length transaction on fair and reasonable terms and (b)
the Board of Directors of the Company approves such transactions with the
Designated Director included in the majority of the Board approving such
transactions, after full disclosure of the facts.
7.6 Capital Expenditures. The Company shall not incur, in any
--------------------
twelve-month period, capital expenditures (including expenditures for
capitalized leases) in excess of $150,000 or any single capital expenditure in
excess of $60,000. This Section 7.6 may be waived by action of the Board of
Directors, without the consent of the Required Holders, provided that the
Designated Director is included in the majority of directors voting to permit
such waiver.
7.7 Payments; No Default. The Company shall make all required
--------------------
payments of rent, taxes, debts and other material obligations of the Company
promptly when due. The Company shall not be in default with respect to any
material contracts, agreements or instruments to which the Company is a party or
by which the Company is bound.
18
<PAGE>
7.8 Material Contracts. Other than renewing the Employment
------------------
Agreements on their current terms and conditions, the Company shall not, during
any fiscal year of the Company, enter into material contracts pursuant to which
the Company would incur liabilities in excess of $25,000 individually or $50,000
in the aggregate, unless the Board of Directors of the Company has previously
approved the execution of such contract. Notwithstanding the foregoing, the
aforementioned dollar limitations shall be subject to the review of the Board of
Directors of the Company.
7.9 Compensation. The Company shall pay its officers and directors
------------
such levels of compensation and bonuses as the Compensation Committee of the
Board of Directors may from time to time specify, or as provided in the
Employment Agreement; provided, however, that the Company may make up to 10% of
-------- -------
its annual pre-tax profits available as bonuses payable to Company employees, at
the sole discretion of Company management; provided further, that the Company's
-------- -------
management may elect to pay such bonuses quarterly so long as the aggregate
amount of such quarterly bonuses paid does not exceed 10% of the Company's pre-
tax profits for the year in which such bonuses are paid.
7.10 Acquisitions. The Company shall not acquire the stock or all or
------------
substantially all of the assets or business of any other entity in any form of
transaction.
7.11 Limitations on Raising Additional Capital. The Company, the
-----------------------------------------
Investor and the Founder acknowledge that from and after the Initial Closing,
the Company may be seeking capital in addition to receiving the balance of the
Purchase Price, from both non-profit or non-venture capital sources, such as The
Ben Franklin Partnership or various local or regional economic development
grants, authorities or programs administered by various governmental or quasi-
governmental agencies (collectively, "Non-Private Sources"), as well as from
strategic, corporate sources (collectively, "Corporate Sources").
Notwithstanding any other provision of this Agreement or the Amendment to the
contrary, which otherwise might have prohibited a transaction to raise capital
from either a Non-Private Source or a Corporate Source, the Company shall be
permitted to raise capital from a Non-Private Source, and the Company shall be
permitted to raise equity capital from a Corporate Source if the Corporate
Source shall pay a price per share of Common Stock equivalent of not less than
180% of the lowest price per share of Common Stock equivalent payable by the
Investor pursuant to the terms of the Warrants.
VIII. Registration and Related Rights.
-------------------------------
8.1 Piggyback Registration.
----------------------
(a) As used in this Section 8, "Registration Stock" shall mean
the Conversion Shares (as defined in Section 1.4), and any shares of Common
Stock issued in respect of the Preferred Stock or the Conversion Shares upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event; provided, however, that Registration Stock shall not include any such
-------- -------
shares disposed of pursuant to one or more registration statements under the
Securities Act, or which have been sold pursuant to Rule 144 under the
Securities Act or which have otherwise been sold without registration under the
Securities Act. For purposes of this Section 8, any record holder of securities
convertible into Registration Stock
19
<PAGE>
(or exercisable for securities which are convertible into Registration Stock)
shall be deemed to be the holder of the Registration Stock issuable upon such
exercise and/or conversion.
(b) If the Company shall seek to register under the Securities
Act or qualify any of the securities holdings of the Company or any of its
shareholders (except in connection with any stock option plan, stock purchase
plan, savings or similar plan or an acquisition, merger or exchange of stock, to
be registered on Forms S-4, S-8 or any successor forms under the Securities Act)
and if the form of registration statement proposed to be used otherwise may be
used for the registration of the Registration Stock (as herein defined), then,
on each such occasion, the Company shall furnish the Investor with at least 30
days prior written notice thereof. At the written request of the Investor, given
within 20 days after the receipt of such notice, the Company will use its best
efforts to cause all of the Registration Stock for which registration shall have
been requested by the Investor to be included in such registration statement. In
the event that the proposed registration by the Company is, in whole or in part,
an underwritten public offering of securities of the Company, and the managing
underwriter determines and advises in writing that the inclusion of all
Registration Stock proposed to be included in the underwritten public offering
and other issued and outstanding shares of Common Stock proposed to be included
therein by persons other than (i) holders of Registration Stock or (ii) holders
of Subordinate Stock (as defined in Section 8.4) with rights equal to those of
the holders of Registration Stock ("Other Registration Stock) (such other shares
which are not Registration Stock or Other Registration Stock being the "Other
Shares") would interfere with the successful marketing (including pricing) of
the securities, then the number of shares of Registration Stock, Other
Registration Stock and Other Shares to be included in such underwritten public
offering shall be reduced first, pro rata among the holders of Other Shares;
second, if necessary, pro rata among the holders of Registration Stock and Other
Registration Stock combined, based upon the number of shares requested by
holders thereof to be registered in such underwritten public offering; and
lastly, if necessary, among the Company's shares requested by the Company to be
registered; provided, however, that the holders of Registration Stock do not
-------- -------
then elect to exercise their rights under Section 8.2; and, further provided,
------- --------
that in no event, without the consent of the holders of at least 67% of the
Registration Stock, the percentage of the Registration Stock that is included in
such registration statement shall not be less than the percentage of the
securities of any other shareholder included therein. In the event that the
Company offers any of its securities in an offering exempt from registration
under the Securities Act pursuant to Regulation A, the Company will provide to
the holders of Registration Stock rights comparable to those provided herein.
8.2 Demand Registration.
-------------------
(a) If at any time, the Company shall be requested in writing by
the holders of not less than 67% of the Registration Stock to effect the
registration under the Securities Act of at least 33 1/3% of the Registration
Stock, the Company shall promptly give written notice of such proposed
registration to all record holders of Registration Stock. Such holders shall
have the right, by giving written notice to the Company within 30 days from
receipt of the Company's notice, to elect to have included in such registration
such of their Registration Stock as such holders may request in such notice of
election. Thereupon, the Company shall, as expeditiously as possible, use its
best efforts to effect the registration, on a form of general use under the
Securities Act, of all shares of Registration Stock which the Company has been
20
<PAGE>
requested to register; provided, however, that if the holders of not less than
-------- -------
67% of the Registration Stock shall so request (and at least 50% of the
Registration Stock is being registered), the Company shall file such
registration statement pursuant to Rule 415 or any successor rule or regulation
under the Securities Act, so as to permit the continuous or delayed offering of
the Registration Stock in accordance with the intended method of disposition
specified in the notice of the exercise of rights under this Section 8.2(a), to
the extent such offering qualifies under such rule or regulation, but in no
event shall the Company be required to maintain the effectiveness of such
registration statement beyond a two year period. The Company shall be obligated
to cause to become effective one registration statement pursuant to which
Registration Stock is sold under this Section 8.2(a).
(b) In addition and not in limitation of the rights set forth in
Sections 8.1(b) and 8.2(a), at such time as the Company shall have qualified for
the use of Form S-2 or Form S-3 in an offering solely for the accounts of
persons other than the Company (or any similar form or forms promulgated by the
Securities and Exchange Commission), the holders of not less than 67% of the
Registration Stock shall have the right to request an unlimited number of
registrations on Form S-2 or Form S-3 or other similar forms. Such holders
shall have the right, by giving written notice to the Company within 20 days
from receipt of the Company's notice, to elect to have included in such
registration such of their Registration Stock as such holders may request in
such notice of election. Thereupon, the Company shall, as expeditiously as
possible, use its best efforts to effect the registration, on Form S-2 or Form
S-3 of all shares of Registration Stock which the Company has been requested to
register. The Company shall not be required to effect any such registration
more than once every twelve months. Registrations effected on Form S-2 or Form
S-3 shall not be considered to be demand registrations pursuant to Section
8.2(a) hereof.
(c) The Company may include in a registration requested under this
Section 8.2 any additional authorized shares of the Common Stock of the Company,
whether or not issued, for sale by the Company or for sale by others; provided,
--------
however, that such shares shall not be included to the extent that the holders
- -------
of a majority of the shares of Registration Stock included therein determine in
good faith that the inclusion of such shares will interfere with the successful
marketing of the shares of Registration Stock to be included therein; and,
provided, further, that, upon the election of the holders of a majority of the
- -------- -------
shares of Registration Stock included therein, or if the number of shares to be
so included equals or exceeds the number of shares of Registration Stock
included therein by the holders of Registration Stock, such registration shall
be deemed to be a registration pursuant to Section 8.1(b) hereof.
(d) The underwriter and the terms of the underwriting for any
registration pursuant to this Section 8.2 shall be mutually acceptable to the
Company and the Investor.
(e) Notwithstanding anything contained in this Agreement to the
contrary:
(i) The Company reserves the right to delay any such
registration pursuant to Section 8 for a period of not more than sixty days, or
to withhold efforts to cause such registration statement to become effective for
a period of not more than sixty days,
21
<PAGE>
if the Board of Directors of the Company determines in good faith that such
registration might (A) interfere with or affect the negotiation or completion of
any material transaction that is being contemplated by the Company, or (B)
involve initial or continuing disclosure obligations materially adverse to the
best interest of the Company's shareholders. If, after a registration statement
becomes effective, the Company advises the holders of the Registration Stock
covered by such registration statement that the Company considers it appropriate
for the registration statement to be amended, the holders of such shares shall
suspend any further sales of their registered shares until the Company advises
them that the registration statement has been amended. The time periods referred
to in this Article 8 shall be extended for an additional number of business days
during which the rights to sell shares was suspended.
(ii) The Company shall not be obligated to file a
registration statement pursuant to Section 8.2 within three months after the
effective date of any registration under which piggyback rights were granted
pursuant to Section 8.1.
8.3 Further Obligations of the Company. Whenever the Company is
----------------------------------
required to register any of the Registration Stock pursuant to any of the
provisions of this Section 8, the Company shall also be obligated to do the
following:
(a) Prepare for filing and file with the Securities and Exchange
Commission promptly thereafter a registration statement and such amendments and
supplements to said registration statement and the prospectus used in connection
therewith as may be necessary to keep said registration statement effective and
to comply with the provisions of the Securities Act with respect to the sale of
securities covered by said registration statement for the period necessary (but,
other than as otherwise provided in Section 8.2(a), in no event more than nine
months) to complete the proposed public offering;
(b) Furnish to each selling holder so requesting such copies of
preliminary and final prospectus and such other documents as said holder may
reasonably request to facilitate the public offering of such holder's
Registration Stock;
(c) Use its best efforts to register or qualify the Registration
Stock covered by said registration statement under the securities or Blue Sky
laws of such jurisdictions as not less than 60% of the holders of Registration
Stock may reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and do any
and all other acts and things that may be reasonably necessary or advisable to
enable such seller to consummate the disposition in such jurisdictions of its
Registration Stock covered by such registration statement, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not, but
for the requirements of this subdivision (c), be obligated to be so qualified,
or to subject itself to taxation in any such jurisdiction, or to consent to
general service of process in any such jurisdiction;
(d) Furnish to the selling holders, and any underwriters or
broker-dealers through whom the Registration Stock may be sold, an opinion or
opinions of counsel for the Company and a "cold comfort" letter or letters of
the independent auditors for the Company, in form and substance customary for
similar offerings;
22
<PAGE>
(e) Permit each selling holder or the selling holder's counsel
or other representatives, at the selling holder's expense, to inspect and copy
such corporate documents and records as may reasonably be requested by them;
(f) If so requested, furnish to each selling holder a copy of
all documents filed and all correspondence to or from the Securities and
Exchange Commission in connection with any such offering.
(g) Immediately notify each seller of Registration Stock covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, upon discovery that, or
upon the happening of any event as a result of which, the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and at the request of any such seller or
holder, prepare and furnish to such seller and holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such Registration Stock,
such prospectus shall not include 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 not misleading in the light of the circumstances then
existing;
(h) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of at least twelve months, but not more
than eighteen months, beginning with the first month of the first fiscal quarter
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of subsection 11(a) of the Securities
Act;
(i) Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration statement
from and after a date not later than the effective date of such registration
statement; and
If requested by the Company, each seller of Registration Stock as to which any
registration is being effected shall furnish the Company with such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing as shall be required by law or
by the Commission in connection therewith.
8.4 Registration Rights Equal or Superior. The Company shall not
-------------------------------------
grant any registration rights or register any securities for the account of any
person other than holders of Registration Stock unless permitted to do so by the
written consent of the Required Holders; provided, however, that the Company
-------- -------
shall be entitled to grant registration rights or register any securities for
the account of any person other than holders of Registration Stock without the
consent of the Designated Director as long as such rights applicable to such
securities are made subject and subordinate to, or no more than equal to the
rights of the holders of Registration Stock under Sections 8.1 and 8.2 (such
securities being the "Subordinate Shares").
23
<PAGE>
8.5 Expenses, Etc. All expenses in connection with the preparation
-------------
and filing of any registration statement under this Section 8, any registration
or qualification under the securities or Blue Sky laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by the Company, except for any (i) underwriters' or
brokers' commissions applicable to the shares to be sold by a holder of
Registration Stock, (ii) fees required to be paid by a selling shareholder
rather than the Company in order to comply with Blue Sky or state securities
laws, (iii) other fees or expenses expressly applicable to securities being sold
by the selling shareholder and (iv) fees or expenses of any selling
shareholders' counsel.
8.6 Indemnification. The Company shall indemnify the selling holders
---------------
of Registration Stock, and, to the extent required in any agreement with any
underwriter or broker-dealer through whom the Registration Stock may be sold,
any such underwriter or broker-dealer and each person, if any, who controls any
such underwriter or broker-dealer (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or actions in respect
thereof (under the Securities Act or common law or otherwise) caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Registration Stock were registered under
the Securities Act, any preliminary or final prospectus contained therein, or
any amendment or supplement thereto, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse the
selling holders of Registration Stock for any legal or other out-of-pocket
expenses reasonably incurred by such selling holders in connection with
investigating or defending against such loss, claim, damage, liability or
action; except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement or omission contained in information
furnished in writing to the Company by such selling holders expressly for use
therein. In connection with any such registration statement, the selling holders
of Registration Stock will furnish the Company in writing such information as
may reasonably be requested by the Company for use in any such registration
statement or prospectus and will indemnify the Company, its directors and
officers, and, to the extent required in any agreement with any underwriter or
broker-dealer, each such underwriter or broker-dealer and each person, if any,
who controls the Company or any underwriter or broker-dealer (within the meaning
of the Securities Act) against any losses, claims, damages, liabilities,
expenses and actions in respect thereof (under the Securities Act or common law
or otherwise) resulting from any untrue statement or alleged untrue statement of
a material fact required to be stated in such registration statement or
prospectus and necessary to make the statements therein not misleading; and will
reimburse the Company for any legal or other out-of-pocket expenses reasonably
incurred by it in connection with investigating or defending against such loss,
claim, damage, liability or action; but only to the extent that such untrue
statement or omission was contained in information so furnished in writing by
the selling holders of Registration Stock expressly for use therein, and only to
the extent of proceeds received by the selling holders of Registration Stock in
the offering. The Company further agrees and the selling shareholder shall agree
that, in connection with any underwritten public offering, the Company also will
enter into customary contribution arrangements with the selling holders of
Registration Stock and the underwriters or broker-dealers through whom the
Registration Stock may be sold, with respect to situations in which
indemnification is potentially unavailable.
24
<PAGE>
8.7 Withdrawal. If a public offering is not completed within nine
----------
months after the effective date of any registration statement filed by the
Company pursuant to Section 8.1(b), other than an offering under Rule 415 as
described in Section 8.2(a), the Company reserves the right, at its option, to
withdraw from registration any securities offered by the Company which have not
been sold during such period, provided that no securities offered by any holder
of Registration Stock shall be withdrawn without the consent of the holders of
50% of the Registration Stock.
8.8 Exchange Act. As promptly as possible following receipt of a
------------
written request therefor from the holders of 50% of the outstanding Registration
Stock at any time while the Company either (a) is subject to periodic reporting
pursuant to Section 15(d) of the Exchange Act or (b) has 300 or more
shareholders of record, the Company shall register its Common Stock under
Section 12 of the Exchange Act, arrange for its Common Stock to be listed on a
national stock exchange or included for quotation on Nasdaq or the Nasdaq
National Market, as requested, and shall keep effective such registration and
maintain such listing or inclusion, and shall use its best efforts timely to
file such information, documents and reports as the Securities and Exchange
Commission may require or prescribe that the Company file in connection
therewith. The Company will, at the request of any holder of Registration Stock,
advise such holder in writing as to whether all reports required to be filed by
the Company under Section 13 of the Exchange Act during the 12 months preceding
such request (or for such shorter period as the Company was required to file
such reports) have been filed, and any other information which the holder may
reasonably require in order to comply with Rule 144 under the Act, or any other
comparable rule, as then in effect.
IX. Preemptive Rights.
-----------------
9.1 Until the first to occur of (a) the Investor no longer owning the
Minimum Stock Amount or (b) the consummation of a Qualifying Public offering, if
at any time after the date of this Agreement, the Company issues or proposes to
issue any equity securities, other than (a) the Securities whose issuance is
contemplated by this Agreement; (b) up to an aggregate of 37,024 shares of
Common Stock issuable upon exercise of options granted under the ESOP if the
Original ESOP Amount is in effect, or down to an aggregate of 30,839 shares of
Common Stock issuable upon exercise of options granted under the ESOP if the
Decreased ESOP Amount is in effect; (c) up to an aggregate of 6,185 shares of
Common Stock issuable upon exercise of the Harris options; and shares of Common
Stock issued upon the exercise, exchange or conversion of any security as to
which the Investor had an opportunity to exercise its rights under this Section
9 (an "Issuance"), the Investor shall have the right to purchase up to its
Proportionate Percentage (as defined below) of the type of securities issued or
proposed to be issued in such Issuance on the same price and terms as the
Issuance (to the extent such price and terms are cash prices and terms). The
Investor's "Proportionate Percentage" shall be that percentage equal to the
ratio which (x) the number of shares of outstanding Common Stock then owned by
the Investor bears to (y) the aggregate number of shares of outstanding Common
Stock then owned by all shareholders of the Company. For purposes solely of the
computation required under clauses (x) and (y) above, the Investor holding
Preferred Stock shall be treated as having converted all of its Preferred Stock
into shares of Common Stock at the rate at which such Preferred Stock is
convertible at the time of delivery by the Company of the Option Notice (as
defined below), assuming that all of the targets with respect to the Company's
"Performance Test
25
<PAGE>
Earnings" (as defined in the Warrants and in Section 1.3 hereof) have been met,
and all outstanding Preferred Stock held by other Holders of Preferred Stock
shall likewise be deemed converted.
9.2 In the event of an Issuance, the Company shall deliver to the
Investor a written notice describing such Issuance, specifying the Investor's
pro rata share and stating the purchase price and other terms of such Issuance
(the "Option Notice"). For a period of 45 days from the receipt of the Option
Notice, the Investor shall have the right to elect, by written notice to the
Company, to purchase all or any portion of its pro rata share of such
securities.
X. Participation Rights.
--------------------
10.1 In addition to and not in limitation of the provisions of the
Shareholders' Agreement, the Founder hereby agrees that until the first to occur
of (a) the Investor no longer owning the Minimum Stock Amount or (b) the
consummation of a Qualifying Public Offering, he shall not sell any of the
shares of the capital stock of the Company held by him, unless such sale is in
accordance with the terms and conditions of this Section 10.
10.2 Until the consummation of a Qualifying Public Offering, in the
event that the Founder desires to sell some or all of the shares of the capital
stock of the Company held by him (the "Offered Shares") in a private transaction
then the Founder shall obtain a written offer (the "Offer") to purchase such
Offered Shares solely for cash to be paid in full at the closing of each such
transaction, and shall forward a copy of the Offer to the Company and to the
Investor.
10.3 If, within 30 days of receipt of the offer, the Company notifies
the Founder that it will purchase all of the Offered Shares, then the Founder
shall sell such shares to the Company upon the terms and conditions of the
Offer.
10.4 If the Company declines to purchase all or any portion of the
Offered Shares in accordance with Section 10.3 above, it shall promptly notify
the Investor of such decision. If, within 30 days of receipt of such notice, the
Investor notifies the Founder that it will purchase all or any portion of the
remaining Offered Shares, then the Founder shall sell such shares to the
Investor upon the terms and conditions of the Offer.
10.5 If, after giving effect to Sections 10.3 and 10.4 above, the
Company and the Investor fail to purchase all of the Offered Shares, then the
Founder shall be entitled to sell such shares on the terms set forth in the
Offer for a period of 30 days, commencing upon the expiration of the 30-day
period referred to in Section 10.4 above, subject to the provisions of Section
10.6 below.
10.6 If, after giving effect to Sections 10.3 and 10.4 above, the
Company and the Investor do not agree to purchase all of the Offered Shares,
then the Founder shall use Founder's best efforts to interest the offeror (the
"Offeror") in purchasing such shares as the Investor gives notice that it
desires to sell in such sale (the "Additional Shares"), as well as the Offered
Shares. If the Offeror does not wish to purchase the full amount of the
Additional Shares, then the Investor shall be entitled to sell in the
transaction up to that number of the Additional Shares which, when divided by
the total number of Additional Shares as to which the Investor has given notice
that it desires to sell in the transaction, would be equal to the number of
26
<PAGE>
shares which the Offeror has agreed to purchase, divided by the aggregate number
of shares which the Founder and the Investor sought to sell to the Offeror.
10.7 Other than as set forth above, without the prior written
consent of the Investor, the Founder may not make any transfer of such Founder's
shares of the capital stock of the Company in any transaction not permitted by
the Shareholders' Agreement.
XI. Events of Default.
-----------------
Each of the following shall constitute an Event of Default under this
Agreement:
11.1 Default on Payments to the Investor. The failure of the Company
-----------------------------------
to make (a) within ten days of the date when due, any principal or interest
payment on any Note, any dividend payment upon the Preferred Stock on the date
when due, or any other payment required to be made on the date when due (whether
under the terms of the Notes, the Preferred Stock or the Amendment) in
connection with the redemption of the Preferred Stock or under the terms of the
Notes, or (b) failure of the Company to make any other payment upon any other
note, guaranty or obligation of the Company to the Investor or held by the
Investor, or required hereunder, within 30 days after written notice from the
Investor to the Company; regardless of whether any such failure to make the
payments described in (a) and (b) above is due to a legal inability or
incapacity of the Company to make any such payments.
11.2 Information, Representations and Warranties. Any information
-------------------------------------------
furnished or representation or warranty made or given by the Company herein
shall prove to have been untrue when made or given in any material respect or
shall have omitted to state a material fact respecting the matters set forth
therein necessary to make the matters set forth therein not misleading.
11.3 Covenants and Agreements. The failure of the Company to
------------------------
observe, perform or abide by any other covenant, warranty, agreement or
provision of this Agreement, the Amendment, the Notes, the Warrants, the
Preferred Stock, or any of the documents executed by the Company in connection
herewith or therewith or referred to herein or therein, which failure is not
cured to the Investor's reasonable satisfaction within 30 days (the "Cure
Period") after written notice from the Investor to the Company of its
occurrence; provided, however, that no Event of Default shall be considered to
--------- -------
have occurred if the failure is not the failure to pay money and is of such a
nature that it reasonably cannot be cured within the Cure Period, but if it is
curable and the Company in good faith begins efforts to cure it within the Cure
Period and continues diligently to do so, the Company shall have an additional
30 days from the date on which the Cure Period ends to effect the cure. If the
failure continues after the expiration of such additional 30 day period,
regardless whether such failure might be curable at some time beyond such
additional 30 day period, such failure shall nevertheless be considered an Event
of Default.
11.4 Default on Other Obligations. The occurrence of a material
----------------------------
default following the expiration of any applicable cure period, if any, in any
material obligation of the Company or any violation of law or refusal of
regulatory permission which has a material adverse effect on the Company's
operations.
27
<PAGE>
11.5 Certain Events As To The Company. The Company or any of its
--------------------------------
material subsidiaries shall (A) admit in writing its inability to pay its debts
generally as they become due; (B) file a petition or answer or consent seeking
relief under the Federal Bankruptcy Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy or insolvency law
or other similar law, not discharged or vacated or set aside or stayed within 45
days; (C) consent to the institution of proceedings under any law referenced in
(B) above, not discharged or vacated or set aside or stayed within 45 days, or
to the filing of any such petition, not discharged or vacated or set aside or
stayed within 45 days or to the appointment or taking possession of a receiver,
liquidator, assignee, trustee, custodian (or other similar official) of the
Company or any subsidiary or of any substantial part of their property; (D) fail
generally to pay its debts as such debts become due, or take corporate action in
furtherance of any such action; (E) make an assignment for the benefit of its
creditors; or (F) fail to meet any of its material monetary obligations with the
exception of trade payables, in the amounts and for the periods set forth on
Schedule 2.2 attached hereto; provided, however, that no Event of Default shall
- ------------- -------- -------
be considered to have occurred under subsection 11.5(F) if the failure to meet
such material monetary obligations is due to a good faith dispute between such
parties, which dispute shall continue for no more than 30 days; provided
--------
further, that upon the expiration of such 30 day period (the "Expiration Date"),
- -------
the Company shall have, upon notice to the Investor an additional 30 day period
to resolve the dispute. If the dispute is not resolved after the expiration of
such additional 30 day period, regardless whether such dispute may be resolved
at some time beyond such additional 30 day period, such failure under subsection
11.5(F) shall nevertheless be considered an Event of Default.
11.6 Certain Events As To The Founder. The Founder dies, is
--------------------------------
disabled for a period in excess of 120 days during which the Founder is unable
to perform his duties as an officer of the Company for a full eight hour day
(the "disability" of the Founder), terminates his employment with the Company or
has his employment terminated by the Company.
XII. Rights of Investor Upon Default.
-------------------------------
12.1 Rights on Default. If there shall occur and be continuing an
-----------------
Event of Default as defined in the foregoing Section 11, the Investor, or if
there are then Holders of Preferred Stock, the Holders of at least 75% of the
Preferred Stock may, by written notice to the Company, declare the Company to be
in default hereunder, whereupon: (i) if the Investor or the Holders of at least
75% of the Preferred Stock, as applicable, so specifies in such notice, any
Notes then outstanding, the balance of all accrued dividends upon the Preferred
Stock, and all other indebtedness of the Company to the Investor now or
hereafter incurred, shall become immediately due and payable without further
demand, presentation or notice of any kind; and (ii) the Founder hereby agrees
that, at such time, he shall vote his shares in such a manner and take such
actions as may be necessary or advisable, in the reasonable opinion of the
Investor or the Holders of at least 75% of the Preferred Stock, to best ensure
the repayment of the Notes and payment of all such accrued dividends upon the
Preferred Stock and repayment of all such other indebtedness to the Investor.
12.2 Additional Rights. The Investor shall have such additional
-----------------
rights and remedies as are contained herein, in the Notes, the Warrants, the
Preferred Stock, the Amendment, or in any other documents and agreements
delivered or given in connection
28
<PAGE>
herewith, and all rights which it might have at law or equity, all of which
rights and remedies shall be cumulative.
XIII. Further Assurance. The Company and the Investor agree to execute
-----------------
and deliver all such other instruments and take all such other actions as any
party may reasonably request from time to time before or after the Initial or
Subsequent Closing Date and without payment of further consideration, in order
to effectuate the transactions provided for herein. The parties shall cooperate
fully with each other and with their respective counsel and accountants in
connection with any steps required to be taken as part of their respective
obligations under this Agreement.
XIV. Miscellaneous.
-------------
14.1 Waivers and Amendments. No waiver by either party of any
----------------------
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
14.2 Governing Law. This Agreement and all questions relating to
-------------
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
notwithstanding any conflict-of-law provisions to the contrary.
14.3 Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, this Agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors and
assigns.
14.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and supersedes all prior agreements, understandings, inducements or conditions,
express or implied, oral or written, except as herein contained. The express
terms hereof control and supersede any course of performance and/or usage of
trade inconsistent with any of the terms hereof.
14.5 Notices. All notices, requests, demands and other
-------
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly made and received when personally served,
or when mailed by first class mail or overnight, by courier service such as
Federal Express, postage prepaid, or telecopied with answer back receipt and
hard copy sent in the manner set forth above, addressed as set forth below:
(i) If to the Company or the Founder, then to:
Quadrant International Inc.
170 Warner Road
Suite 102
29
<PAGE>
Wayne, PA 19087
Attn: President
with a copy, given in the manner
prescribed above, to:
Cozen & O'Connor
The Atrium
1900 Market Street
Philadelphia, PA 19103
Attn: Michael J. Heller, Esquire
(ii) If to NEPA II, then to:
NEPA Venture Fund II, L.P.
125 Goodman Drive
Bethlehem, PA 18015
Attn: Glen R. Bressner
with a copy, given in the manner prescribed above, to:
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Attn: Raymond D. Agran, Esquire
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
14.6 Payment of Expenses. All reasonable legal fees and expenses
-------------------
incurred by counsel on behalf of the Investor in connection with this Agreement
and the preparation and negotiation hereof, subject to Section 2.2(j), shall be
paid by the Company.
14.7 Brokers. Each party represents that it has not retained any
-------
finder or broker in connection with the transactions contemplated by this
Agreement and will indemnify, defend and hold the other party harmless from any
claim based on breach of this representation.
14.8 Delays or Omissions. It is agreed that no delay or omission to
-------------------
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other
30
<PAGE>
breach or default theretofore or thereafter occurring. It is further agreed that
any waiver, permit, consent or approval of any kind or character of any breach
or default under this Agreement, or any waiver of any provision or condition of
this Agreement must be in writing and shall be effective only to the extent
specifically set forth in writing, and that all remedies, either under this
Agreement or by law or otherwise, shall be cumulative and not alternative.
14.9 Titles. The titles of the Sections of this Agreement are for
------
convenience of reference only and are not to be considered in construing this
Agreement.
14.10 Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
14.11 Execution; Counterparts. This Agreement may be executed in
-----------------------
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
14.12 Exhibits; Schedules. All Exhibits and Schedules attached
-------------------
hereto are hereby incorporated by reference into, and made a part of, this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and written above.
Attest: QUADRANT INTERNATIONAL INC.
/s/ Randi Garnick By: /s/ Gregg W. Garnick
- ---------------------------- -----------------------------------
Secretary Gregg Garnick, President
Witness: FOUNDER:
____________________________ /s/ Gregg W. Garnick
-----------------------------------------
Gregg Garnick
NEPA VENTURE FUND II, L.P.
By: NEPA II Management Partners, L.P., its
General Partner
By: NEPA II Management Corporation, its
General Partner
31
<PAGE>
By: /s/ Frederick J. Beste III
------------------------------
Frederick J. Beste III
President
32
<PAGE>
EXHIBIT 4.14
EXECUTION COPY
QUADRANT INTERNATIONAL, INC.
CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT
April 28, 1999
<PAGE>
CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT (the "AGREEMENT"),
dated April 28, 1999, by and between QUADRANT INTERNATIONAL, INC., a
Pennsylvania corporation (the "COMPANY"), and each of the PURCHASERS who are
signatories hereto (individually, a "PURCHASER" and collectively, the
"PURCHASERS").
BACKGROUND
----------
The Company is seeking to raise up to an aggregate of $3,000,000 in
cash in order to carry on and expand its business and to acquire rights to
certain intellectual property by entering into the License and Development
Agreement in the form attached hereto as Exhibit F (the "LICENSE AGREEMENT")
---------
with Intel Corporation, ("INTEL"), pursuant to which the Company has agreed to
issue to Middlefield Ventures, Inc. ("MIDDLEFIELD") promissory notes convertible
into 1.2 million shares of a new Class of the Company's Convertible Preferred
Stock, and the Purchasers are willing to provide such funds and such
intellectual property rights by purchasing securities of the Company on the
terms contained or referred to herein (the "FINANCING"). In connection with the
Financing, the Company desires to issue and sell to the Purchasers an aggregate
of up to $4,716,000 of its authorized but unissued Convertible Promissory Notes
("NOTES"). Each Purchaser desires to purchase that aggregate amount of Notes
shown on the Signature Page of this Agreement under the caption "AGGREGATE
SUBSCRIPTION AMOUNT" (the "SIGNATURE PAGE").
NOW, THEREFORE, the Company and the Purchasers hereby agree as
follows:
1. PURCHASE AND SALE OF NOTES.
1.1 AUTHORIZATION. The Company has authorized the issuance of (a)
Notes in the form attached hereto as Exhibit A in the aggregate principal amount
---------
of $4,716,000, and (b) an aggregate of 3,297,902 shares of its authorized but
unissued Class C Preferred Stock upon conversion of the Convertible Promissory
Notes. The Class C Preferred Stock is convertible into Common Stock of the
Company, $0.01 par value per share ("COMMON STOCK") at the initial rate of one
share of Common Stock for each share of Preferred Stock and has the
designations, powers, preferences and other rights set forth in the Company's
Third Amended and Restated Articles of Incorporation attached hereto as Exhibit
-------
B (the "ARTICLES"). For purposes of the Agreement, the term "PREFERRED SHARES"
- -
means the shares of Class C Preferred Stock issuable upon conversion of the
Notes, the term "CONVERSION SHARES" means the shares of Common Stock issuable
upon conversion of the Preferred Shares and the term "SECURITIES" means the
Notes, the Preferred Shares and the Conversion Shares.
1.2 PURCHASE AND SALE. Subject to the terms and conditions of this
Agreement, the Company hereby issues and sells to each Purchaser, and each
Purchaser hereby purchases from the Company, the aggregate amount of Notes set
forth on the Signature Page. In consideration for the Notes, the Purchaser
hereby pays the Company the Purchase Price set forth on the Signature Page (the
"PURCHASE PRICE"); provided, however, that in payment of the Purchase Price for
the Notes to be purchased by Middlefield (i) Middlefield shall pay the Company
the amount set forth opposite its name on the Signature Page and (ii) Intel
shall execute and deliver to the Company the License Agreement.
<PAGE>
1.3 SEPARATE AGREEMENTS. The Company's agreement with each of the
Purchasers is a separate agreement, and the sale of Convertible Promissory Notes
to each of the Purchasers is a separate sale.
2. THE CLOSING.
2.1 CLOSING DATE. The closing and the delivery of the Notes to the
Purchasers representing an aggregate Purchase Price of $4,716,000 ($3,000,000 of
which shall be paid in cash (the "Cash Consideration") and $1,716,000 shall be
deemed paid by Intel for its execution and delivery of the License Agreement)
shall be held on April 27, 1999 at the offices of Brobeck, Phleger & Harrison
LLP ("BROBECK"), concurrently with the execution of this Agreement, or at such
time and place as the Company and the Purchasers may agree (in either case, the
"CLOSING"). The date of the Closing is hereinafter referred to as the Closing
Date.
2.2 DELIVERIES OF THE COMPANY. On the Closing Date, the Company shall
deliver to each Purchaser hereunder:
(a) Notes having a face amount equal to the Aggregate
Subscription Amount of such Purchaser;
(b) copies of resolutions adopted by the Board of Directors of
the Company, and certified by the Secretary of the Company, (i)
authorizing and approving the Articles, this Agreement and the other
agreements and documents required to be delivered hereby, (ii) the
issuance of the Securities, and (iii) the consummation of all other
transactions contemplated hereby;
(c) a copy of a written consent of the Company's shareholders
approving the adoption and filing with the Commonwealth of
Pennsylvania of the Articles;
(d) copies of the Company's Second Amended and Restated Articles
of Incorporation and Third Amended and Restated Bylaws as then in
effect, certified by the Secretary of the Company;
(e) a Subsistence Certificate for the Company issued by the
Secretary of the Commonwealth of the Commonwealth of Pennsylvania, as
of a recent date;
(f) an opinion from Brobeck, Phleger & Harrison LLP, counsel to
the Company, in the form attached hereto as Exhibit B-1
-----------
(g) a certificate of incumbency signed by the Secretary of the
Company, certifying the names, titles and signatures of certain of the
Company's officers;
(h) an unqualified opinion of KPMG Peat Marwick LLP on the
Company's financial statements for the fiscal year ended December 31,
1998;
2
<PAGE>
(i) the Amended and Restated Registration Rights Agreement
("REGISTRATION RIGHTS AGREEMENT") between the Company and the
signatories thereto in the form attached hereto as Exhibit C;
---------
(j) the Amended and Restated Shareholders' Agreement
("SHAREHOLDERS' AGREEMENT") between the Company and the signatories
thereto in the form attached hereto as Exhibit D;
---------
(k) the License Agreement;
(l) receipt for the full amount of the Purchase Price paid by
such Purchaser.
2.3 DELIVERIES OF THE PURCHASERS AT THE CLOSING. On the Closing
Date, each Purchaser thereunder shall execute and deliver to the Company this
Agreement, the Registration Rights Agreement, the License Agreement and the
Shareholders' Agreement, required to be executed by such Purchaser and shall pay
the Cash Consideration to the Company by wire transfer of immediately available
funds in accordance with the Company's written wire instructions. The Company
shall immediately transfer the Cash Consideration received from Middlefield to
an escrow account (the "ACCOUNT") of Citibank, N.A., (the "ESCROW AGENT") by
wire transfer of immediately available funds in accordance with wire transfer
instructions provided by the Escrow Agent. The Escrow Agent shall administer
the funds so deposited in accordance with an Escrow Agreement among the Company,
the Purchaser and the Escrow Agent in the form attached hereto as Exhibit E (the
---------
"ESCROW AGREEMENT"). The Company shall pay the fees of the Escrow Agent
provided for in the Escrow Agreement.
2.4 DELIVERY ON THE EFFECTIVE DATE. On the Automatic Conversion Date
(as defined in the Notes), subject to the satisfaction of the conditions set
forth herein and in the Escrow Agreement, the Escrow Agent shall pay from the
Account (i) the Cash Consideration to the Company by wire transfer in accordance
with written wire transfer instructions provided by the Company, and (ii) any
interest earned on the Cash Consideration while it was deposited in the Account
to Middlefield by wire transfer in accordance with written wire transfer
instructions provided by Middlefield. If Middlefield demands repayment of the
Note prior to the Effective Date, then the Escrow Agent shall, upon
Middlefield's delivery to the Escrow Agent of a demand for payment, and without
any other action by any other party, pay from the Account the Cash
Consideration, together with interest earned on the Cash Consideration while it
was deposited in the Account to Middlefield, after which Middlefield shall
promptly deliver the Notes to the Company for cancellation.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As of the date of this Agreement, the Company (which for purposes of
this Agreement shall include, unless the context requires otherwise, all
subsidiaries of the Company (the "SUBSIDIARIES") as of the date hereof, whether
direct or indirect, including, but not limited to Cinco and Viona Development
Hard & Software Engineering GmbH (collectively, "Viona")) hereby represent and
warrant to the Purchasers (regardless of any investigation made or information
obtained by the Purchasers), as a material inducement to the Purchasers to enter
into this Agreement, as follows:
3
<PAGE>
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Each of the Subsidiaries are duly organized,
validly existing and in good standing of their respective jurisdictions of
organization. The Company and each of the Subsidiaries has all requisite
corporate power and authority to own and lease its properties and to conduct its
business as presently conducted and as currently proposed to be conducted. The
Company is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction listed in Schedule 3.1 attached
------------
hereto, such jurisdictions being all the jurisdictions in which it owns or
leases properties or conducts any business so as to require such qualification,
except where the failure to be so qualified would not have a material adverse
effect on the Company and the Subsidiaries, taken as a whole. The minute books
and stock records of the Company are complete and accurate in all material
respects and all signatures included therein are the genuine signatures of the
persons whose signatures are required. As used in this Agreement, "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the business, Properties,
assets, operations, results of operations, liabilities, or financial condition
of the Company and the Subsidiaries (as defined below) taken as a whole, or on
the transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith.
3.2 SUBSIDIARIES, ETC. Except for the entities set forth in Schedule
--------
3.2, the Company has no subsidiaries and does not own, directly or indirectly,
- ---
any capital stock, security, partnership interest or other interest of any kind
in any corporation, partnership, joint venture, association or other entity.
The Company directly or indirectly owns all of the shares of capital stock of
the Subsidiaries free and clear of all Liens or Encumbrances or claims.
3.3 CAPITALIZATION. As of the date of this Agreement, the Company's
authorized capital stock consists of (a) 80,000,000 shares of Common Stock, of
which (i) 19,925,106 shares are issued and outstanding; (ii) 8,336,292 of which
are available for issuance pursuant to currently outstanding options granted
under the Company's stock option plan; (iii) 2,633,708 shares are reserved and
available for issuance pursuant to the Company's stock option plans; and (iv)
14,864,579 shares are available for issuance pursuant to currently outstanding
options and warrants granted outside of the Company's stock option and purchase
plans (each of which is described in Schedule 3.3 at the exercise prices set
------------
forth in Schedule 3.3), and (b) 31,523,684 shares of Preferred Stock, of which
------------
(i) 6,523,684 shares are designated Class A Convertible Preferred Stock, par
value $.01 per share (the "CLASS A PREFERRED STOCK"), of which no shares are
issued and outstanding and 5,520,033 shares are subject to outstanding warrants
to purchase Class A Preferred Stock at the exercise prices set forth in Schedule
--------
3.3, (ii) 25,000,000 shares have been designated Class B Convertible Preferred
- ---
Stock, par value $.01 per share (the "CLASS B PREFERRED STOCK"), 23,478,434
shares of which are issued and outstanding and rights to purchase $500,000 worth
of which presently exist. The capitalization of the Company following the
Financing (assuming the entire equity financing is raised) is as set forth on
Schedule 3.3(b). There are no treasury shares held by the Company. All
- ---------------
outstanding shares of capital stock of the Company have been, or upon issuance
will be, validly issued, fully paid and nonassessable. Except as disclosed in
Schedule 3.3, no shares of capital stock of the Company are subject to
- ------------
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company or were issued in violation of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or applicable state
securities laws. Except as set forth in this
4
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Section 3.3 or in Schedule 3.3, as of the date of this Agreement, (i) there are
------------
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the Company
or the Subsidiaries, or contracts, commitments, understandings or arrangements
by which the Company or the Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for, any
shares of capital stock of the Company or the Subsidiaries, (ii) there are no
outstanding debt securities, (iii) there are no agreements or arrangements under
which the Company or the Subsidiaries are obligated to register the sale of any
of their securities under the Securities Act except pursuant to the Registration
Rights Agreement, dated as of April 30, 1998 among the Company and the
Purchasers of Series B Preferred Stock and the Registration Rights Agreement,
and (iv) other than as contemplated by Section 7.9 or the Articles, there are no
outstanding securities of the Company or the Subsidiaries which contain any
redemption or similar provisions, or any contracts, commitments, understandings
or arrangements by which the Company or the Subsidiaries are or may become bound
to redeem or purchase a security of the Company or the Subsidiaries. Except as
disclosed in Schedule 3.3, there are no securities or instruments containing
------------
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities. The Company has furnished to the Purchasers true and correct
copies of the Company's Articles of Incorporation and Bylaws and all amendments
thereto, and all other charter or organizational documents of the Company and
the Subsidiaries, and the terms of all securities convertible into or
exercisable for any shares of capital stock of the Company and the material
rights of the holders thereof in respect thereto. A current shareholders' list
giving the names and number of shares of capital stock of the Company owned by
each shareholder of the Company is attached hereto as part of Schedule 3.3.
------------
Other than subsequent sales of securities of the Company for which antidilution
protection has been waived, or as listed on Schedule 3.3, no dilution events
------------
have occurred with respect to any of the Company's securities and each
exercisable and convertible security of the Company is exercisable for and
convertible into a like number of shares of capital stock.
3.4 AUTHORIZATION. The Company has all necessary corporate power and
authority to enter into and perform this Agreement, and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), to issue and deliver the Notes, and upon the effectiveness of the
Restated Articles, to issue and deliver the Preferred Shares and Conversion
Shares in accordance with the terms hereof and thereof. The execution, delivery
and performance of the Transaction Documents by the Company and the consummation
of the transactions contemplated hereby and thereby, including, without
limitation, the filing of the Articles, the issuance and sale of the Notes, the
issuance of the Preferred Shares upon conversion of the Notes, and the issuance
of the Conversion Shares, upon conversion of the Preferred Shares, were duly
authorized by the Company's Board of Directors on April 23, 1999. The Articles
were approved by written consent of Shareholders of the Company (the "WRITTEN
CONSENT") on April 27, 1999. On April 27, 1999, notice of the Written Consent
was sent by certified mail to each Shareholder of the Company who did not sign
the Written Consent at the address of such Shareholder contained in the
shareholder records of the Company. The Written Consent will become effective
and will be in full force and effect under Pennsylvania law on May 6, 1999 (the
"CONSENT EFFECTIVENESS DATE"). No further consent or authorization is
5
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required by the Company, its Board of Directors or its shareholders. The
Transaction Documents have been duly executed and delivered by the Company. Each
of the Transaction Documents constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to or affecting generally the enforcement of creditors' rights and
remedies, or the application of equitable principles.
3.5 ISSUANCE OF SECURITIES. The Notes are duly authorized for
issuance and sale to the Purchasers by the Company pursuant hereto and upon the
Effective Date (without the requirement of any further actions by the Company or
its shareholders), the Class C Preferred Stock shall be duly authorized for
issuance and sale to the Purchasers by the Company upon conversion of the Notes
and, upon issuance in accordance with the terms thereof, shall be fully paid and
nonassessable, and will be free of any tax, lien, charge or encumbrance of the
Company (other than restrictions on transferability expressly set forth in
applicable federal and state securities laws). The Class C Preferred Stock,
taken together as a whole, will on the conversion of the Notes (assuming the
entire Financing is raised) represent not less than ____% of the total voting
power of all capital stock or other voting securities of the Company
outstanding. The Conversion Shares will have been duly authorized and reserved
for issuance upon the Effective Date (without the requirement of any further
action by the Company or its Shareholders) and upon conversion of the Class C
Preferred Stock and upon such issuance, the Conversion Shares will be validly
issued, fully paid and nonassessable and free from any tax, lien, charge or
encumbrance of the Company or the Subsidiaries (other than restrictions on
transferability expressly set forth in applicable federal and state securities
laws). At all times from and after the Closing, the Company will have authorized
and will reserve and keep available solely for issuance and delivery upon
conversion of the Notes the number of shares of Class C Preferred Stock issuable
upon conversion thereof and solely for issuance and delivery upon conversion of
the Class C Preferred Stock, at least the number of Conversion Shares issuable
upon conversion or exercise thereof.
3.6 CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS.
(a) Schedule 3.6 contains a true and complete list of all of the
------------
following written Contracts to which the Company or any of the Subsidiaries is a
party or by or to which any of them or their assets or Properties are or may be
bound or subject, as each such Contract may have been amended, modified or
supplemented:
i. pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or arrangement, or
any collective bargaining agreement or any other Contract with any labor union,
or severance agreements, programs, policies or arrangements;
ii. Contracts for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or other basis
providing annual compensation in excess of $50,000 (or providing for the payment
of any cash or other compensation upon a change in control of the Company or the
Subsidiaries) or contract relating to loans to officers, directors or
Affiliates;
6
<PAGE>
iii. Contracts under which the Company or any of the
Subsidiaries has advanced or loaned any other Person amounts in the aggregate
exceeding $5,000 other than credit terms issued to customers in the ordinary
course of business of less than $25,000;
iv. Contracts relating to borrowed money or other
Indebtedness or the mortgaging, pledging or otherwise placing of a Lien or
Encumbrance on any asset or Properties or group of assets or Properties of the
Company or the Subsidiaries or any letter of credit arrangements (other than
trade payables incurred in the ordinary course of business);
v. guarantees of any obligation in excess of $50,000
(other than trade payables incurred in the ordinary course of business of less
than $50,000);
vi. Contracts under which the Company or any of the
Subsidiaries is lessee of or holds or operates any Property, real or personal,
owned by any other party except for any lease of real or personal Property under
which the aggregate annual rental payments do not exceed $50,000;
vii. Contracts under which the Company or any of the
Subsidiaries is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by the Company or any of the
Subsidiaries;
viii. Contracts or group of related Contracts with the same
party or group of affiliated parties the performance of which involves
consideration in excess of $100,000;
ix. assignments, licenses, indemnifications or agreements
with respect to any intangible property (including, without limitation, any
Intellectual Property Rights) other than Contracts for the sale of products in
the ordinary course of business and "off-the-shelf" software available to the
public generally;
x. warranty Contracts with respect to its products sold,
leased or licensed or its services rendered which contains terms and conditions
that differ in any material respect from the Company's or any of the
Subsidiaries' standard warranty terms and conditions (a true and complete copy
of which standard terms and conditions has heretofore been furnished to each of
the Purchasers);
xi. Contracts under which the Company or any of the
Subsidiaries has granted any Person any registration rights which are not
superseded by the Registration Rights Agreement;
xii. sales, distribution, dealer or franchise Contracts;
xiii. Contracts prohibiting any Person from freely engaging
in any business or competing anywhere in the world; and
7
<PAGE>
xiv. any other agreement which is material to the business,
operations, assets, Properties, liabilities, condition (financial or otherwise),
results of operations or business licenses of the Company or any of the
Subsidiaries or which involves consideration in excess of $100,000 annually.
(b) The Company has heretofore delivered to each of the
Purchasers, or its counsel true and complete copies of all of the Contracts
listed or required to be listed in Schedule 3.6. Each such Contract listed or
------------
required to be listed in Schedule 3.6 is valid, binding and enforceable against
------------
the Company in accordance with its respective terms, and is in full force and
effect. The Company and the Subsidiaries have performed in all material respects
all obligations required to be performed by it under each such Contract and
neither the Company nor any of the Subsidiaries is in default under or in breach
of or in receipt of any claim of default or breach under any material Contract.
No event has occurred which with the passage of time or the giving of notice or
both would result in a default, breach or event of noncompliance by the Company
or any of the Subsidiaries under any material Contract. Neither the Company nor
any of the Subsidiaries have any present expectation or intention of not fully
performing all such obligations, and the Company has no knowledge of any breach
or anticipated breach by the other parties to any such Contract. Neither the
Company nor any of the Subsidiaries is a party to any Contract or commitment
requiring it to purchase or sell goods or services or lease property above or
below (as the case may be) prevailing market prices and rates.
3.7 BREACH. The Company and the Subsidiaries are in compliance with
(a) the terms of their respective articles of incorporation and bylaws or other
organizational documents, (b) all applicable laws, statutes, ordinances, rules,
regulations or other legal requirements, whether federal, state, local or
foreign, and (c) all applicable orders, writs, judgments, injunctions, awards
and decrees (of which the Company is aware) of any court, other Governmental
Entity or arbitrator, in case of clauses (a), (b) and (c), in which the failure
to comply would have a material adverse effect on the Company and the
Subsidiaries taken as a whole. Neither the Company nor any of the Subsidiaries
has received any written or, to the Company's knowledge, oral notice, of any
violation by the Company or any of the Subsidiaries of, or default by the
Company or any of the Subsidiaries under, any of the items described in clauses
(a) through (c) above in this paragraph.
3.8 EMPLOYEES, OFFICERS AND DIRECTORS. A current list of the names
and addresses of all officers and directors of the Company and the Subsidiaries
is attached hereto as Schedule 3.8. Except as described on Schedule 3.6 or
------------ ------------
Schedule 3.8, neither the Company nor the Subsidiaries has entered into any
- ------------
employment or other agreements with any of its employees, officers or directors,
or any of its former employees, officers or directors (the "EMPLOYMENT
AGREEMENTS"). The Company and the Subsidiaries have complied in all material
respects with all laws relating to the employment of labor (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes).
Neither the Company nor any of the Subsidiaries is bound by or subject to (and
none of either the Company's or any of the Subsidiaries' assets or Properties
are bound by or subject to) any Contract with any labor union, and no labor
union has requested or, to the best of the Company's knowledge, sought to
represent any of the employees, representatives or agents of the Company or any
of the Subsidiaries. To the Company's best knowledge, there is no strike or
other labor dispute involving the Company or any of the
8
<PAGE>
Subsidiaries pending or threatened, and the Company is not aware that the
Company or any of the Subsidiaries has any other material labor relations
problems (including, without limitation, any labor organization activities, work
stoppages or material grievances). Neither the Company nor any of the
Subsidiaries has received any notice that any officer, or employee, or that any
group of employees, intends to terminate their employment with the Company or
any of the Subsidiaries, nor does the Company or any of the Subsidiaries have a
present intention to terminate the employment of any of the foregoing. Except to
the extent reflected in the Employment Agreements, the employment of each
officer and employee of the Company and the Subsidiaries is terminable at the
will of the Company.
3.9 COMPLIANCE WITH LAWS. Except as described in Schedule 3.9, the
------------
Company and the Subsidiaries are in compliance with all existing requirements of
laws, including but not limited to federal, state, local and foreign laws, rules
and regulations, and all existing requirements of all governmental bodies or
agencies having jurisdiction over either of them, the failure to comply with
which might have a material adverse effect on the assets or business of the
Company or the Subsidiaries, their assets or business.
3.10 CONFLICT WITH DOCUMENTS. Except as disclosed in Schedule 3.10 or
-------------
as explicitly provided in this Agreement, the execution, delivery and
performance of the Transaction Documents by the Company and the consummation of
the transactions contemplated hereby and thereby (including, without limitation,
the reservation for issuance and the issuance of the Conversion Shares), either
immediately or with the passage of time or the giving of notice or both, will
not:
(a) conflict with or cause a breach or an event of default under
any of the terms, conditions or provisions of, result in a termination
or modification of, or cause any acceleration of any obligation of the
Company or the Subsidiaries under any Contract, lease or other
instrument to which the Company or the Subsidiaries is bound or by
which any of the their respective properties or material assets may be
affected;
(b) result in a violation of the articles of incorporation or the
by-laws or other organizational document of the Company or the
Subsidiaries or any statute, law, rule or regulation or any order,
judgment or decree to which the Company or the Subsidiaries or any of
their respective Properties or material assets are subject; or
(c) result in the creation or imposition of any lien, charge or
encumbrance against the Company or the Subsidiaries or any of their
respective properties or material assets.
3.11 FINANCIAL STATEMENTS. The Company has delivered to the
Purchasers copies of its audited annual consolidated financial statements
(balance sheets, income statement, statement of cash flows and statement of
shareholders' equity) for and at the fiscal year ended December 31, 1998, and
unaudited consolidated financial statements (balance sheets, income statement,
statement of cash flows and statement of shareholders' equity) for and at the
quarter ended March 31, 1999, all of which are attached hereto as Schedule
--------
3.11(a) (collectively, the
- -------
9
<PAGE>
"FINANCIAL STATEMENTS"). The audited and unaudited financial statements referred
to above are correct and in accordance with the books and records of the
Company, are prepared in accordance with generally accepted accounting
principles consistently applied for the periods covered therein, and each
presents fairly, in all material respects, the Company's financial position at
the end of the period specified and the results of their operations and
financial condition for such period, subject to normal recurring adjustments.
3.12 TAXES.
(a) All Tax Returns relating to, or including items attributable
to the operations of, the Company or any of the Subsidiaries or
relating to any Tax for which the Company or any of the Subsidiaries
may be liable that were required to be filed with any Taxing Authority
with respect to any Taxable period ending on or before the Closing
have been or will be filed when due (including any extensions of such
due date). All such Tax Returns are or will be complete, true and
correct in all material respects. All amounts of Taxes owed by the
Company or the Subsidiaries with respect to periods through the
Closing have either been paid or fully accrued on the Financial
Statements. Subject to immaterial year-end accounting adjustments, the
accruals and reserves for Taxes set forth in the Financial Statements
are sufficient to pay all unpaid Taxes of the Company or the
Subsidiaries attributable (on an accrual basis) to all periods ended
on or before the Closing. All Taxes that either the Company or the
Subsidiaries is or was required by law to withhold or collect (or any
such Taxes for which the Company or any of the Subsidiaries may be
liable) have been duly withheld or collected and, to the extent
required, have been paid to the proper Taxing Authority. All Taxes
withheld or collected by the Company or the Subsidiaries but not yet
required to be paid to the proper Taxing Authority have been set aside
in accounts for later payment to the proper Taxing Authority or
accrued, reserved against and entered upon the books of the Company or
the Subsidiaries, subject to immaterial year-end accounting charges.
For purposes of this Agreement, the following terms have the following
meanings: "TAX" (and, with correlative meaning, "TAXES" and "TAXABLE")
means any and all taxes including, without limitation, (i) any net
income, alternative or add-on minimum tax, value-added, gross income,
gross receipts, sales, use, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp,
value added, net worth, occupation, premium, property, environmental
or windfall profit tax, custom, duty or other tax, governmental fee or
other like assessment or charge in the nature of a Tax of any kind
whatsoever, together with any interest or any penalty, addition to tax
or additional amount imposed thereon by any Governmental Entity (a
"TAXING AUTHORITY") responsible for the imposition of any such tax
(domestic or foreign), (ii) any liability for the payment of any Taxes
described in clause (i) above as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable
period or as a result of being a transferee or successor thereof and
(iii) any liability for the payment of any Taxes described in clause
(i) or (ii) above as a result of any express or implied obligation to
indemnify any other person for said Taxes, and "TAX RETURNS" means all
reports,
10
<PAGE>
returns, declarations, statements or other information required to be
supplied to a Taxing Authority in connection with Taxes.
(b) Neither the Company nor any of the Subsidiaries has ever had
any material Tax deficiency proposed or assessed against it and has
not executed any waiver of any statute of limitations on the
assessment or collection of any Tax. None of the Company's or the
Subsidiaries' federal or foreign income Tax Returns and none of their
respective state income or franchise Tax or sales or use Tax Returns
has ever been adjusted as a result of an audit by a Tax Authority.
3.13 LITIGATION. Except as set forth on Schedule 3.13, there is no
action, suit, claim, proceeding, inquiry or investigation pending or, to the
Company's knowledge, threatened against the Company or any of the Subsidiaries
which questions the validity of this Agreement or any other Transaction
Document, or the right of the Company or any of the Subsidiaries to enter into
any of them, or to consummate the transactions contemplated hereby or thereby,
or which would, either individually or in the aggregate, have a material adverse
effect on the Company and the Subsidiaries taken as a whole or their collective
operations, assets, Properties, financial condition, results of operations or
business licenses. The foregoing includes, without limitation, actions pending
or, to the Company's knowledge, threatened (or any basis therefor known to the
Company) involving the prior employment of any of the Company's or the
Subsidiaries' employees or consultants, their use in connection with the
Company's or the Subsidiaries' businesses or any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. Neither the Company nor any of the
Subsidiaries is a party or subject to the provisions of any known order, writ,
injunction, judgment or decree of any court or Governmental Entity. There is no
action, suit, claim, proceeding or investigation by the Company or any of the
Subsidiaries currently pending or which the Company or any of the Subsidiaries
intends to initiate, except as set forth on Schedule 3.13.
3.14 PERMITS. The Company and the Subsidiaries have all franchises,
permits, licenses and any similar authority necessary for the conduct of their
business as now being conducted and as proposed to be conducted, the lack of
which could not reasonably be expected to have a material adverse effect on the
Company and the Subsidiaries taken as a whole. Neither the Company nor any of
the Subsidiaries is in default in any respect under any of such franchises,
permits, licenses or other similar authority.
3.15 TRADEMARKS, PATENTS, ETC.
(a) Schedule 3.15 contains a complete and accurate list of all
-------------
(i) patented or registered Intellectual Property Rights owned or used
by the Company or any of the Subsidiaries, (ii) pending patent
applications and applications for registrations of other Intellectual
Property Rights filed by the Company or any of the Subsidiaries, (iii)
material unregistered trade names and corporate names owned or used by
the Company or any of the Subsidiaries and (iv) material unregistered
trademarks, service marks, copyrights, mask works and computer
software owned or used by the Company or any of the Subsidiaries.
Schedule 3.15 also contains a complete and accurate list of all
-------------
licenses and other rights
11
<PAGE>
granted by the Company or the Subsidiaries to any third party with
respect to any Intellectual Property Rights and all licenses and other
rights granted by any third party to the Company or the Subsidiaries
with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. The Company and
the Subsidiaries own all right, title and interest to, and have the
right to use pursuant to a valid license, all Intellectual Property
Rights material to the operation of the businesses of the Company and
the Subsidiaries as presently conducted and as presently proposed to
be conducted, free and clear of all Liens or Encumbrances. Except to
the extent set forth on Schedule 3.15, the previous loss or expiration
-------------
of any Intellectual Property Right or related group of Intellectual
Property Rights owned or used by the Company or any of the
Subsidiaries has not had and is not reasonably likely to have a
material adverse effect on either the Company and the Subsidiaries,
taken as a whole, and no such loss or expiration is, to the best of
the Company's knowledge, threatened, pending or reasonably
foreseeable. The Company and the Subsidiaries have taken all actions
reasonably necessary to maintain and protect the Intellectual Property
Rights which they own. To the best of the Company's knowledge, the
owners of any Intellectual Property Rights licensed to the Company or
any of the Subsidiaries have taken all material actions reasonably
necessary to maintain and protect the Intellectual Property Rights
which are subject to such licenses.
(b) Except to the extent set forth on Schedule 3.15, (i) the
-------------
Company and the Subsidiaries own all right, title and interest in and
to all of the Intellectual Property Rights listed or required to be
listed on Schedule 3.15, free and clear of all Liens or Encumbrances,
-------------
except for such liens and encumbrances which would not, in the
aggregate, have a material adverse effect on the Company and the
Subsidiaries, taken as a whole, (ii) neither the Company nor any of
the Subsidiaries has received any written or known oral notices of any
infringement or misappropriation by, or conflict with, any third party
with respect to such Intellectual Property Rights (including, without
limitation, any demand or request that the Company or any of the
Subsidiaries license any rights from a third party) nor, to the
Company's knowledge, is there valid grounds for any such infringement,
misappropriation or conflict, (iii) to the best knowledge of the
Company, the conduct of the Company's and the Subsidiaries' business
has not infringed, misappropriated or conflicted with and does not
infringe, misappropriate or conflict with any Intellectual Property
Rights of other Persons, and (iv) to the best of the Company's
knowledge, the Intellectual Property Rights owned by or licensed to
the Company or the Subsidiaries have not been infringed,
misappropriated or conflicted by other Persons. The transactions
contemplated by this Agreement shall have no material adverse effect
on the Company's or the Subsidiaries' right, title and interest in and
to the Intellectual Property Rights listed or required to be listed on
Schedule 3.15.
-------------
3.16 ENVIRONMENTAL LAWS.
(a) The Company and the Subsidiaries (i) have complied with any
and all federal, state, local or foreign statute, law, rule,
regulation, ordinance or other
12
<PAGE>
provision having the force or effect of law, any judicial or
administrative order or determination, or any contractual obligations
or common law, in each case concerning public health and safety,
worker health and safety and pollution or protection of the
environment (including, without limitation, all those relating to the
presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control or cleanup of any
hazardous or otherwise regulated materials, substances or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants,
toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation ("ENVIRONMENTAL OR
SAFETY REQUIREMENTS"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental or
Safety Requirements to conduct its business and (iii) is in compliance
with all terms and conditions of any such permit, license or approval,
except to the extent that the matters within clauses (i), (ii) or
(iii) above would not have a material adverse effect on the Company
and the Subsidiaries taken as a whole.
(b) There is no substance designated a "hazardous substance" by
any Environmental or Safety Requirement, including asbestos,
petroleum, urea formaldehyde insulation and petroleum by-products
("HAZARDOUS SUBSTANCE") present at any of the Property or Properties
currently owned or leased by the Company or the Subsidiaries, except
to the extent that such presence could not reasonably be expected to
have a material adverse effect; and with respect to such Property, and
to the knowledge of the Company, there has not occurred (i) any
release or any threatened release of a Hazardous Substance or (ii) any
discharge or threatened discharge of any Hazardous Substance into the
ground, surface or navigable waters, which discharge or threatened
discharge violates any federal, state, local or foreign laws, rules or
regulations concerning water pollution, except as set forth in
Schedule 3.16(b).
(c) Neither the Company nor any of the Subsidiaries has disposed
of, transported, or arranged for the transportation or disposal of any
Hazardous Substance where such disposal, transportation or arrangement
would give rise to liability pursuant to any Environmental or Safety
Requirement other than any such liabilities that could not reasonably
be expected to have a material adverse effect on the Company or the
Subsidiaries.
3.17 INSURANCE. The Company and the Subsidiaries maintain the
liability, property and casualty insurance listed on Schedule 3.17 attached
-------------
hereto. Such insurance policies provide the level of coverage generally carried
by similarly situated companies, all such insurance policies are in full force
and effect and neither the Company nor the Subsidiaries is in default of any
provision thereof. Neither the Company nor the Subsidiaries have received
notice from the issuer of any such insurance policies of its intention to cancel
or refusal to renew any policy issued by it. Neither the Company nor the
Subsidiaries have any self-insurance, co-insurance or similar risk retention
programs.
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3.18 CONSENTS AND APPROVALS. Except as set forth on Schedule 3.18, no
-------------
permit, consent, approval or authorization of, or filing with, any governmental
regulatory authority or agency or any other Person is necessary to be obtained,
made or given by the Company or the Subsidiaries in connection with the
execution, delivery and performance of the Transaction Documents, or the
consummation of the transactions contemplated hereby and thereby, except as may
be required by any federal or state securities laws, with which the Company will
comply.
3.19 LIABILITIES. Neither the Company nor the Subsidiaries have any
liabilities, whether related to tax or non-tax matters, known or unknown, due or
not yet due, liquidated or unliquidated, fixed or contingent, or otherwise,
except (i) as provided in the balance sheet of the Company as of March 31, 1999
set forth at Schedule 3.11, (ii) as set forth on Schedule 3.19 or (iii) for
------------- -------------
liabilities of a non-material nature incurred in the normal course of the
Company's or the Subsidiaries' business since March 31, 1999.
3.20 ASSETS. The Company and the Subsidiaries have good and marketable
title to all of their respective assets free and clear of all Liens or
Encumbrances, charges, claims and defects of any kind or character, except for
such liens, encumbrances, charges, claims and defects which occur in the
ordinary course of business, which in the aggregate would not have a material
adverse effect on the Company and the Subsidiaries taken as a whole, or which
are set forth on Schedule 3.20 (collectively, "PERMITTED LIENS"). To the best
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of the knowledge of the Company, all equipment, furniture and fixtures, and
other tangible personal property of the Company and the Subsidiaries are in good
operating condition and repair and do not currently require any repairs other
than normal routine maintenance to maintain such property in good operating
condition and repair.
3.21 CONFLICTING INTERESTS. Except as set forth on Schedule 3.21 or
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as contemplated by Section 7.9, no director or officer, or any relative or
affiliate of any director or officer of the Company or the Subsidiaries, or, to
the best of the knowledge of the Company, any employee, shareholder or any
relative or affiliate of any of the employees or shareholders (a) has any
pecuniary interest in any supplier or customer of the Company or the
Subsidiaries or in any other business enterprise with which the Company or the
Subsidiaries conducts business or with which the Company or the Subsidiaries is
in competition; (b) is indebted to the Company or the Subsidiaries for money
borrowed; or (c) is directly or indirectly interested in any material contract
with the Company or the Subsidiaries or has any material interest in any
material assets or Property used by the Company or the Subsidiaries.
3.22 NO PAYMENTS TO SHAREHOLDERS OR OTHERS. Except as set forth on
Schedule 3.22 or as contemplated by Section 7.9, since March 31, 1999, there has
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not been any purchase or redemption of any shares of stock of the Company or the
Subsidiaries by the Company or the Subsidiaries or any transfer, distribution or
payment by it, directly or indirectly, of any money or other property or assets
to any shareholder or to any other person, other than (i) payments made in the
ordinary course of business for goods and services in arm's length transactions,
and (ii) wages paid to non-executive employees. The salaries and benefits
payable to the officers of the Company or the Subsidiaries have not been
increased since March 31, 1999.
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3.23 ABSENCE OF MATERIAL CHANGES. Except as set forth in Schedule
--------
3.23, since March 31, 1999, (a) there has not been any material adverse change
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in the business, operations, assets, Properties, liabilities, financial
condition, results of operations, or business licenses of the Company or any of
the Subsidiaries, and (b) there has not been:
i. any damage, destruction or loss, whether or not covered by
insurance, which has had or could reasonably be expected to have a
material adverse effect on the Company and the Subsidiaries, taken as
a whole;
ii. any waiver by the Company or any of the Subsidiaries of a
right of material value or of a material debt owed to it;
iii. any satisfaction or discharge of any Lien or Encumbrance
(except for Permitted Liens) or payment of any obligation by the
Company or any of the Subsidiaries, except in the ordinary course of
business and which is not material to the Company and the
Subsidiaries, taken as a whole;
iv. any sale, assignment or transfer by the Company or any of
the Subsidiaries of any material patents, trademarks, copyrights,
trade secrets or other intangible assets or Properties;
v. any sale, assignment or transfer by the Company or any of
the Subsidiaries of any material tangible assets or Properties other
than in the ordinary course of business;
vi. other than as contemplated by this Agreement, any
resignation or termination of employment of any officer of the Company
or any of the Subsidiaries or any impending or planned resignation or
termination of employment of any such officer;
vii. any mortgage, pledge, transfer of a security interest in,
or other Lien or Encumbrance, created by the Company or any of the
Subsidiaries, with respect to any of their respective material
Properties or assets, except Permitted Liens, Liens or Encumbrances
for taxes not yet due or payable and Liens or Encumbrances under
equipment leases entered into in the ordinary course of business;
viii. any capital expenditures or commitments therefor by the
Company or any of the Subsidiaries that aggregate in excess of
$50,000;
ix. any loans or guarantees made by the Company or any of the
Subsidiaries to or for the benefit of its employees, officers,
directors or consultants, or any members of their immediate families;
x. any declaration, setting aside or payment or other
distribution in respect of any of the capital stock or other equity
securities of the Company or any of the Subsidiaries or any direct or
indirect redemption, purchase or other
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acquisition of any of such stock or equity securities by the Company
or any of the Subsidiaries;
xi. any material change in any compensation arrangement or
agreement with any key employee of the Company or any of the
Subsidiaries;
xii. any other event or condition of any character which
might materially adversely affect the Company and the Subsidiaries
taken as a whole;
xiii. any agreement or commitment by the Company or any of
the Subsidiaries to do any of the foregoing.
3.24 PROPRIETARY INFORMATION AGREEMENT. Each material or technical
service provider of the Company and the Subsidiaries has executed a proprietary
information and inventions agreement that provides for the confidential
treatment of the Intellectual Property Rights of the Company and the
Subsidiaries and the assignment to the Company and the Subsidiaries of
inventions developed in connection with the performance of services for the
Company or any of the Subsidiaries in the form previously furnished to the
Purchasers. To the Company's best knowledge, no such officer, consultant or
employee is in violation thereof. None of the Company, the Subsidiaries or any
of their respective employees, is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreements with third parties
relating to, affecting or in conflict with the present or proposed business
activities of the Company or any of the Subsidiaries.
3.25 ERISA.
(a) Except as set forth on Schedule 3.25, neither the Company
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nor any of the Subsidiaries maintains, contributes to or has any
actual or potential liability with respect to any (i) "defined
contribution plan" (as defined in Section 3(34) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"))(a
"SAVINGS PLAN"), (ii) "welfare employee benefit plan" (as defined in
Section 3(1) of ERISA) (a "WELFARE PLAN") or (iii) nonqualified
deferred compensation, incentive, bonus, material fringe benefit,
stock bonus or other material benefit arrangements (collectively,
together with Savings Plans and Welfare Plans, "PLANS").
(b) Neither the Company nor any of the Subsidiaries maintains,
contributes to or has any actual or potential liability with respect
to any active or terminated, funded or unfunded (i) multiemployer plan
(as defined in Section 3(37) of ERISA), (ii) defined benefit plan (as
defined in Section 3(35) of ERISA) or (iii) plan or arrangement to
provide medical, health, life insurance or other welfare-type benefits
for currently retired or future retired or terminated employees
(except the continued health benefit coverage required to be provided
under Section 4980B of the Code or similar state law).
(c) The Company has provided to the Purchasers or its counsel
accurate and complete copies of each of the Plans and any related
trusts, insurance contracts or other agreements, the United States
Internal Revenue Service (the
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"IRS") favorable determination letter issued with respect to each
Savings Plan, IRS Form 5500s (including all attachments) for each
Savings Plan and each Welfare Plan for the most recently completed
plan year.
(d) Each Welfare Plan and Savings Plan and all related funding
arrangements substantially comply in form and operation with their
terms and the applicable requirements of ERISA, the Code and any other
laws. Each Savings Plan has received a favorable determination letter
that it qualifies under the Code (and that its trust is exempt from
tax under the Code) and such favorable letter includes changes
required by the 1986 Tax Reform Act, as amended. Nothing has occurred
since the date of such favorable determination letter that could
adversely affect the qualified status of any Savings Plan or the tax-
exempt status of the trust.
(e) None of the Company, any of the Subsidiaries nor any trustee
or administrator of any Plan or other Person has engaged in any non-
exempt, prohibited transaction with respect to any Plan which could
subject the Company or the Subsidiaries or any of their employees to
any tax or penalty or other liability imposed by ERISA or the Code.
The Company and the Subsidiaries have complied in all material
respects with the requirements of Section 4980B of the Code and
Section 601 et. seq. of ERISA ("COBRA"). All contributions which are
due under each of the Plans has been made and all other contributions
have been properly accrued. The Company and the Subsidiaries have
complied in all material respects with all reporting and disclosure
obligations with respect to the Welfare Plans and the Savings Plan.
3.26 CUSTOMERS AND SUPPLIERS. No material supplier of the Company or
any of the Subsidiaries has indicated that it will stop, or materially decrease
the rate of, supplying materials, products or services to the Company or any of
the Subsidiaries, and no material customer has indicated that it will stop, or
materially decrease the rate of, buying materials, products or services from the
Company or any of the Subsidiaries.
3.27 EXEMPTION FROM REGISTRATION. Assuming the accuracy of each
Purchaser's representations and warranties contained in Section 4, the offer and
sale of the Notes as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act and all state securities or blue
sky laws, and any issuance and delivery of Preferred Shares or Conversion Shares
to the Purchasers will be exempt from the registration requirements of the
Securities Act and all state securities or blue sky laws. Neither the Company
nor, to the knowledge of the Company, any Person acting on its behalf has, in
connection with the offering of the Notes engaged in (a) any form of general
solicitation or general advertising (as those terms are used within the meaning
of Rule 502(c) under the Securities Act), (b) any action involving a public
offering within the meaning of Section 4(2) of the Securities Act, (c) any
action which would require the registration of the offering and sale of the
Notes (or of any issuance or delivery of the Preferred Shares or the Conversion
Shares) under the Securities Act, or (d) any action which would violate any
state securities or blue sky laws. The Company has not made and will not make,
directly or indirectly, any offer or sale of capital stock or other equity or
debt security if, as a result, the offer and sale of the securities contemplated
hereby would fail to be entitled to exemption from the registration requirements
of the Securities Act.
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As used herein, the terms "offer" and "sale" have the respective meanings
specified in Section 2(3) of the Securities Act.
3.28 MANUFACTURING AND MARKETING RIGHTS. Except as set forth on
Schedule 3.28, neither the Company nor any of the Subsidiaries have granted
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rights to manufacture, produce, assemble, license, market, or sell their
Products to any other person and is not bound by any agreement that affects the
Company's or any of the Subsidiaries' exclusive right to develop, manufacture,
assemble, distribute, market or sell their Products.
3.29 RETURNS AND COMPLAINTS. Neither the Company nor any of the
Subsidiaries has received any material customer complaints concerning their
Products and/or services, nor have they had any of their Products returned by a
purchaser thereof due to the failure to meet specifications, other than minor or
immaterial, nonrecurring warranty problems, and claims not in excess of $25,000,
individually or $100,000, in the aggregate, for any single customer.
3.30 PRODUCT DEFECTS. Neither the Company nor any of the Subsidiaries
has received any material customer complaints concerning material defects in
their Products and/or services, nor have they had any of their Products returned
by a purchaser thereof due to the failure to meet specifications, other than
minor or immaterial, nonrecurring warranty problems, and claims not in excess of
$25,000, individually or $100,000, in the aggregate, for any single customer.
3.31 SECTION 83(B) ELECTIONS. To the Company's knowledge, following
due inquiry, all individuals who have purchased shares of the Company's Common
Stock that are subject to a risk of forfeiture have timely filed elections under
Section 83(b) of the Code (as defined below) and analogous provisions of
applicable state tax laws.
3.32 PRODUCTS. There are no known defects in the design or technology
embodied in any product which the Company or any of the Subsidiaries markets or
has marketed in the past that impair or are likely to impair the intended use of
the product or injure any consumer of the product or third party, except that
warranty claims may arise in the normal course of business for products shipped
prior to the Closing Date in an aggregate amount of no more than the warranty
reserves established on the most recent balance sheet of the Company. The
Company is not aware of any claim asserting (a) any damage, loss or injury
caused by any product, or (b) any breach of any express or implied product
warranty or any other similar claim with respect to any product of the Company
or the Subsidiaries other than standard warranty obligations (to replace, repair
or refund) made by the Company or any of the Subsidiaries in the ordinary course
of business, except for those claims that, if adversely determined against the
Company or any of the Subsidiaries, would not have a material and adverse effect
on the Company's or any of the Subsidiaries' business.
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3.33 YEAR 2000 COMPLIANCE. The Company has undertaken an assessment
of all of its IT Systems (as defined herein) and such systems are, or prior to
September 1, 1999 will be, Year 2000 Compliant (as defined herein). The Company
is not aware of any Material Third Party (as defined herein) or any material
off-the-shelf software that is used by the Company that will not be Year 2000
Compliant by September 1, 1999. For purposes of this Section 3.31: (a) "Year
2000 Compliant" shall mean that the IT Systems will: (i) accurately process
all date and time data (including, but not limited to, calculating, comparing
and sequencing) including, without limiting the foregoing, between the years
1999 and earlier and the years 2000 and later (in either direction, forward or
backwards); (ii) accurately process leap year calculations for date and time
data; and (iii) when used in combination with any other IT System, accurately
process date and time data if such other IT System properly exchanges date and
time data with it; (b) "IT Systems" shall mean any and all systems, facilities
and devices by which information (including data, text and images) is generated,
stored, processed, displayed, received or communicated, including computer
hardware, computer software and any machinery which incorporates a microchip;
and (c) "Material Third Party" shall mean any of the Company's information
exchange partners, suppliers, vendors and distributors that own any IT System
which is material to the Company's business.
3.34 INFORMATION AND DOCUMENTS. The Company has fully provided each
of the Purchasers with all of the information and documents that the Purchasers
and their representatives have requested in connection with the transactions
contemplated hereby and all information and documents that the Company believes
are reasonably material to each Investor's investment decision and to the
business, operations, assets, Properties, liabilities, condition (financial or
otherwise), results of operations, or business licenses of the Company or any of
the Subsidiaries. There is no presently existing event, fact or condition known
to the Company (other than worldwide general business economic conditions) that
currently has or could have a material adverse effect on the Company or any of
the Subsidiaries. No provisions in the Transaction Documents relating to the
Company or any other document, schedule, exhibit, attachment, written statement,
document, certificate or other information furnished by the Company to the
Purchaser in connection with the execution, delivery and performance of the
Transaction Documents, or the consummation of the transactions contemplated
hereby and thereby, contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact required to be stated in
order to make the statement, in light of the circumstances in which it is made,
not misleading.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS AND RESTRICTIONS ON
TRANSFER. Each Purchaser represents and warrants to the Company solely with
respect to such Purchaser as follows:
4.1 LEGAL POWER. Each Purchaser has the requisite individual,
corporate, partnership, trust or fiduciary power, as applicable, and is
authorized, if such Purchaser is a corporation, partnership or trust, to enter
into this Agreement, to purchase the Securities and to carry out and perform its
obligations under the terms of this Agreement.
4.2 INVESTMENT. The Purchaser (i) is acquiring the Notes, (ii) upon
conversion of the Notes, will acquire the applicable Preferred Shares then
issuable, and (iii) upon conversion of the Preferred Shares will acquire the
applicable Conversion Shares then issuable,
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for investment for its own account and not with a view to, or for resale in
connection with, any distribution of the Securities. The Purchaser understands
that the Securities have not been registered under the Securities Act, or under
any state securities or "Blue Sky" laws, and, as a result, are subject to
substantial restrictions on transfer. The Purchaser acknowledges that the
Securities must be held indefinitely unless subsequently registered under the
Securities Act and any applicable state securities or "Blue Sky" laws, or
exemptions from registration under the Securities Act and such laws are
available; provided, however, that by making the representations herein, the
Purchaser does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption from
registration under the Securities Act and any applicable state securities or
"Blue Sky" laws.
4.3 DUE EXECUTION. This Agreement has been duly executed and
delivered by such Purchaser and constitutes a valid and legally binding
obligation of such Purchaser, enforceable in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors rights and to general
equity principles.
4.4 STATUS OF PURCHASER. The Purchaser is an "accredited investor,"
as that term is defined in Rule 501(a) of Regulation D under the Securities Act.
4.5 LEGENDS. The Purchasers understand that the certificates or other
instruments representing the Notes and the Preferred Shares and, until such time
as the sale of the Conversion Shares have been registered under the Securities
Act, the stock certificates representing the Conversion Shares, except as set
forth below, shall bear a restrictive legend in substantially the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND SUCH LAWS.
The legend set forth above shall be removed and the Company shall issue a
certificate or other instrument without such legend to the holder of the
Securities upon which it is stamped if, unless otherwise required by state
securities laws, (i) such Securities are registered for sale under the
Securities Act, (ii) in connection with a sale transaction, such holder provides
the Company with an opinion of counsel, in a form reasonably acceptable to the
Company's counsel, to the effect that a public sale, assignment or transfer of
such Securities may be made without registration under the Securities Act, or
(iii) such holder provides the Company with an opinion of counsel, in a form
reasonably acceptable to the Company's counsel, that such Securities can be sold
pursuant to Rule 144(k) promulgated under the Securities Act (or a successor
rule thereto) ("RULE 144"). The Purchasers acknowledge, covenant and agree to
sell the Securities represented by a certificate(s) or other instrument(s) from
which the legend has been removed, only pursuant to (i) a registration statement
effective under the Securities Act, or (ii) advice of counsel that such sale is
exempt from registration required by Section 5 of the Securities Act.
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5. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained herein shall survive as to each
Purchaser the consummation of the transactions provided for in the Transaction
Documents and shall not terminate. No such representation or warranty shall be
deemed to have been waived, affected or impaired by any investigation made by
any person or persons.
6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants to
comply with the following affirmative covenants, unless waived by the holders of
a majority in interest of the Notes or the Class C Preferred Stock, as
applicable, then outstanding, until the closing of an underwritten initial
public offering of any of the Company's securities under the Securities Act (or
any successor statute), yielding gross proceeds to the Company of at least
$20,000,000 (the "CLASS C PERIOD").
6.1 FINANCIAL STATEMENTS. The Company shall furnish to the Purchasers
the following financial statements, reports and other documents, such financial
statements to be prepared in accordance with generally accepted accounting
principles consistently applied, certified by the Company's chief executive or
financial officer:
(a) as soon as available, and in any event within 90 days after
the end of each fiscal year of the Company, a consolidated balance
sheet of the Company and its subsidiaries as of the end of such fiscal
year and related consolidated statements of operations, shareholders'
equity and cash flows for such fiscal year, all in reasonable detail
and setting forth in comparative form the figures as of the end of and
for the previous fiscal year, which consolidated financial statements
shall have been audited, in accordance with U.S. generally accepted
accounting principles (GAAP) and shall be accompanied by an
unqualified opinion addressed to the Company from "Big Six"
independent auditors or other independent auditors that are reasonably
satisfactory to the Board of Directors of the Company, together with a
copy of such auditors' letter to Company's management;
(b) as soon as available, and in any event within 30 days after
the end of each month for such month and for the year to date, an
unaudited consolidated balance sheet and unaudited consolidated
statements of operations, shareholders' equity and cash flows,
together with a comparison of such financial statements with the
budget of the Company for such period which financial statements shall
be prepared in accordance with GAAP, consistently applied, except they
may not contain full footnote disclosures and may be subject to normal
year-end adjustments for recurring accruals; and
(c) as soon as available, and in any event at least 30 days
prior to the end of each fiscal year of the Company, an annual budget
and business plan of the Company and its subsidiaries for the
subsequent fiscal year, which budget and business plan shall include a
monthly breakdown of financial statements, which breakdown shall
include the underlying assumptions and a brief qualitative description
of the Company's plan by the Company's Chief Executive Officer in
support of such budget and business plan, which also shall have been
approved
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and accepted by the Board of Directors of the Company. If during the
course of operations for any such month it becomes apparent that
deviations from such financial statements, budget and business plan
have occurred, the Company shall submit to its Board of Directors a
statement of such deviation within five business days from the date of
the Company's knowledge of such deviation (the "STATEMENT"). The
Statement shall detail the manner in which a new financial projection
deviates from the annual business plan and the reason therefor. The
Board of Directors shall have the right to ask questions or request
any other reasonable additional information with respect to the
Statement. Any and all subsequent deviations from such financial
statements shall be resubmitted to the Board of Directors of the
Company for approval and acceptance or for required further revision
until such approval and acceptance is obtained.
(d) Each of the financial statements referred to in subsections
(a)- (c) above shall present fairly in all material respects the
consolidated financial condition, results of operations and cash flows
of the Company and its subsidiaries in accordance with GAAP applied on
a consistent basis as of the dates and throughout the periods set
forth therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments for
recurring accruals (none of which would, alone or in the aggregate, be
materially adverse to the business, operations, assets, Properties,
liabilities, financial condition, results of operations of the Company
and its subsidiaries taken as a whole).
The Company shall, upon request, prepare and deliver each of the
foregoing financial statements in such format, and by such electronic or other
means of transmission, as any Purchaser may reasonably request including a
quarterly financial summary, executed by the Company's chief financial officer,
within 30 days of end of any such quarter.
6.2 CONFIDENTIALITY AND NONDISCLOSURE.
(a) The terms and conditions of the Transaction Documents and
the License Agreement (collectively, the "Financing Agreements"),
including their existence, shall be considered confidential
information to Intel and the Company and shall not be disclosed by any
party hereto to any third party (other than to the existing
shareholders of the Company and members of the Company's Board of
Directors) except in accordance with the provisions set forth below.
(b) Within sixty (60) days of the Closing, the Company may issue
a press release disclosing that Intel has invested in the Company;
provided that the release does not disclose any of the terms and
conditions of the Financing Agreements (the "Financing Terms") and the
final form of the press release is approved in advance in writing by
Intel. No other announcement regarding Intel's investment in the
Company in a press release, conference, advertisement, announcement,
professional or trade publication, mass marketing materials or
otherwise to the general public may be made without Intel's prior
written consent.
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(c) Notwithstanding the foregoing, (i) any party may disclose
any of the Financing Terms, including Intel's investment in the
Company, to its current or bona fide prospective investors, employees,
investment bankers, lenders, accountants and attorneys; (ii) any party
may disclose (other than in a press release or other public
announcement described in subsection (b)) solely the fact that the
Investors are investors in the Company to any third parties without
the requirement for the consent of any other party or nondisclosure
obligations; and (iii) Intel may disclose its investment in the
Company and the Financing Terms to third parties or to the public at
its sole discretion and, if it does so, the other parties hereto shall
have the right to disclose to third parties any such information
disclosed in a press release or other public announcement by Intel.
(d) In the event that any party is requested or becomes legally
compelled (including without limitation, pursuant to securities laws
and regulations) to disclose the existence of the Financing Agreements
or any of the Financing Terms hereof in contravention of the
provisions of this Section 6.2, such party (the "Disclosing Party")
shall provide the other parties (the "Non-Disclosing Parties") with
prompt written notice of that fact so that the appropriate party may
seek (with the cooperation and reasonable efforts of the other
parties) a protective order, confidential treatment or other
appropriate remedy. In such event, the Disclosing Party shall furnish
only that portion of the information which counsel to the Company has
advised is legally required and shall exercise reasonable efforts to
obtain reliable assurance that confidential treatment will be accorded
such information to the extent reasonably requested by any Non-
Disclosing Party.
(e) The provisions of this Section 6.2 shall be in addition to,
and not in substitution for, the provisions of any separate
nondisclosure agreement executed by any of the parties hereto with
respect to the transactions contemplated hereby. Additional
disclosures and exchange of confidential information between the
Company and Intel (including without limitation, any exchanges of
information with any Intel board observer) shall be governed by the
terms of the Corporate Non-Disclosure Agreement No. 85625, dated
December 18, 1996, executed by the Company and Intel, and any
Confidential Information Transmittal Records ("CITR") provided in
connection therewith.
6.3 ADDITIONAL INFORMATION.
(a) The Company shall, as promptly as possible (but, in any
event, within ten days) after obtaining knowledge of the occurrence of
any receipt of notice of any default or event of default, any default
under any material agreement to which it or any of its subsidiaries is
a party, or any other material adverse development or event, furnish
Purchasers with a detailed written notice of such default or event and
the proposed response of Company management.
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(b) The Company shall, as promptly as possible (but, in any
event, within ten days) after the commencement thereof, furnish
Purchasers with notice of all material actions, suits and proceedings
before any court or governmental agency, commission, board, bureau,
department or instrumentality, domestic or foreign, affecting the
Company or its subsidiaries.
(c) The Company shall promptly furnish the Purchasers with all
notices for and minutes of meetings of the shareholders and/or
directors of the Company or its subsidiaries, and all written consents
taken by the shareholders and/or directors of the Company or its
subsidiaries.
(d) The Company shall, as promptly as possible (but, in any
event, within ten days) after sending, making available, or filing the
same, furnish the Purchasers with all reports and financial statements
that the Company shall send or make available to the shareholders or
the directors of the Company.
(e) The Company shall, as promptly as possible (but, in any
event, within ten days) after the occurrence thereof, furnish
Purchaser with prompt written notice of all material developments and
transactions outside of the ordinary course of business or which might
otherwise have a significant effect on the Company's or the
subsidiary's business prospects or financial condition or on the
Purchasers' investment in the Company.
(f) The Company shall furnish the Purchasers with such other
information with respect to the business, properties, assets, or the
condition of operations, financial or otherwise, of the Company or its
subsidiaries as the Purchasers may, from time to time, reasonably
request.
(g) The Purchasers agree not to disclose to third parties any
information concerning the Company which is furnished to the
Purchasers by the Company and designated as confidential, except as
required by law, legal process or its fiduciary duty to report
financial and business information to its partners, shareholders,
directors or affiliates and to such other persons as the Purchasers,
in the exercise of their prudent business judgment, may select and
shall use reasonable commercial efforts to have such persons maintain
such confidentiality of the confidential information. The term
"confidential information" does not include information which (i) was
or becomes generally available to the public other than as a result of
a disclosure by the Purchasers, or (ii) was or becomes available to
the Purchasers on a non-confidential basis from a source other than
the Company, provided that such source is not bound by a
confidentiality agreement with the Company.
6.4 INSPECTION. The Company shall permit, at any reasonable time and
from time to time upon reasonable advance notice, the Purchasers or their duly
authorized agents or representatives to examine and make copies of, and extracts
from, the Company's or its subsidiaries' records, books of account, documents
and other materials, to visit its properties, and
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to discuss the affairs, finances and accounts of the Company or its
subsidiaries' with any of the Company's or its subsidiaries' officers,
consultants, directors or independent accountants.
6.5 COMPLIANCE WITH AGREEMENTS. The Company shall perform and observe
all the obligations to Purchasers set forth in this Agreement, the Articles of
Incorporation and the Bylaws.
6.6 MAINTAIN RIGHTS AND FACILITIES. The Company and its subsidiaries
shall at all times cause to be done all things necessary to maintain, preserve
and renew their respective corporate existences and all licenses, permits,
rights, authorizations and franchises necessary to the conduct of their
respective businesses in full force and effect and adequate for their businesses
as presently conducted and proposed to be conducted.
6.7 BOOKS AND RECORDS. The Company and its subsidiaries shall make
and keep proper books, records and accounts, which, in reasonable detail
accurately and fairly reflect their financial condition, results of operations
and make provisions on their financial statements for all proper reserves as in
each case are required in accordance with GAAP, consistency applied, and the
Company's and its subsidiaries' transactions, and shall devise and maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that: (a) transactions are executed in accordance with management's
general or specific authorization; (b) transactions are recorded as necessary to
permit preparation of the financial statements required herein and to maintain
accountability for assets; and (c) access to assets is permitted only in
accordance with management's general or specific instructions and recorded
assets are compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any difference.
6.8 OTHER INSURANCE. The Company shall maintain insurance against
such risks of its and its subsidiaries' businesses and in at least such amounts
as is customarily carried by companies engaged in the same or a similar
business, under valid and enforceable policies issued by insurers of recognized
responsibility.
6.9 CONTRACTS AND AGREEMENTS. The Company and its subsidiaries shall
comply in all material respects with the provisions of all material contracts,
indentures, instruments and agreements, whether oral or written, express or
implied to which it is a party or by which the Company and its subsidiaries or
their properties are bound, and with all other material obligations which the
Company and its subsidiaries incurs or to which they become subject.
6.10 TAXES. The Company and its subsidiaries shall pay and discharge
when payable all federal, state, local, and foreign taxes, assessments,
penalties, interest and governmental charges which become payable by the Company
or its subsidiaries or which shall be imposed upon its properties, and all
claims for labor, materials or supplies which if unpaid might by law become a
lien upon any of its properties; provided, however, that the Company may in good
faith contest any tax, assessment, penalty, or charge, provided that such
contest is asserted in accordance with applicable procedures.
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<PAGE>
6.11 COMPLIANCE WITH LAWS. The Company and its subsidiaries shall
comply with all laws, rules and regulations of all governmental authorities and
agencies applicable to them, their business or properties, the failure to comply
with which might have a material adverse effect on the Company or its
subsidiaries.
6.12 ADDITIONAL AFFIRMATIVE COVENANTS OF THE COMPANY. So long as any
Note remains outstanding, the Company shall also and shall also cause each of
its subsidiaries to:
(a) maintain and keep its material properties in good repair,
working order and condition, and from time to time make all necessary
or desirable repairs, renewals and replacements, so that its
businesses may be properly and advantageously conducted in all
material respects at all times;
(b) pay and discharge when payable all material claims for labor,
materials or suppliers which if unpaid would by law become a lien or
encumbrance upon any of its property, unless and to the extent that
the same are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with
GAAP, consistently applied) have been established on its books with
respect thereto;
(c) maintain the key-man life insurance policies referred to in
Section 6.5;
(d) possess and maintain all material Intellectual Property
Rights necessary to the conduct of their respective businesses
(subject to the Company's right to license such Rights to third
parties in arms' length transactions) and own all right, title and
interest in and to, or have a valid license for, all such Intellectual
Property Rights; and
(e) enter into and maintain non-disclosure agreements with its
employees and consultants.
6.13 EXCHANGE ACT REPORTS. The Company covenants and agrees that,
after such time as it becomes a reporting company under the Securities Exchange
Act of 1934, as amended, the Company shall:
(a) Annual Reports. Furnish to the Investor promptly following
--------------
the filing of such report with the Securities and Exchange Commission
(the "SEC") a copy of the Company's Annual Report on Form 10-K for
each fiscal year, which shall include a consolidated balance sheet as
of the end of such fiscal year, a consolidated statement of income and
a consolidated statement of cash flows of the Company and its
subsidiaries for such year, setting forth in each case in comparative
form the figures from the Company's previous fiscal year, all prepared
in accordance with generally accepted accounting principles and
practices and audited by nationally recognized independent certified
public accountants. In the event the Company shall no longer be
required to file Annual Reports on Form 10-K, the Company shall,
within ninety (90) days following the
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<PAGE>
end of each respective fiscal year, deliver to the Investor a copy of
such balance sheets, statements of income and statements of cash
flows.
(b) Quarterly Reports. Furnish to the Investor promptly following
-----------------
the filing of such report with the SEC, a copy of each of the
Company's Quarterly Reports on Form 10-Q, which shall include a
consolidated balance sheet as of the end of the respective fiscal
quarter, consolidated statements of income and consolidated statements
of cash flows of the Company and its subsidiaries for the respective
fiscal quarter and for the year to-date, setting forth in each case in
comparative form the figures from the comparable periods in the
Company's immediately preceding fiscal year, all prepared in
accordance with generally accepted accounting principles and practices
(except, in the case of any Form 10-Q, the Company shall, within
forty-five (45) days following the end of each of the first three (3)
fiscal quarters of each fiscal year, deliver to the Investor a copy of
such balance sheets, statements of income and statements of cash
flows.
(c) SEC Filings. The Company deliver to the Investor copies of
-----------
each other document filed with the SEC on a non-confidential basis
promptly following the filing of such document with the SEC.
6.14 FILING OF ARTICLES. Unless the Purchasers have earlier demanded
repayment of the Notes, the Company shall file the Articles with the
Commonwealth of Pennsylvania as soon as practicable after, but in no event more
than one business day after, the Consent Effectiveness Date. Promptly after
receipt by the Company of official confirmation that the Articles have been
filed with the Pennsylvania Secretary of State, the Company shall provide such
confirmation to Middlefield and shall provide to Middlefield opinions from
Brobeck, Phleger & Harrison LLP, counsel to the Company, in the form attached
hereto as Exhibit B-2 and Cozen and O'Connor, special Pennsylvania counsel
-----------
to the Company, addressed to the Purchasers in form attached hereto as Exhibit
-------
B-3 (or in customary form and reasonably acceptable to Middlefield), each
- ---
dated the date of the confirmation. The date upon which Middlefield receives
(i) such confirmation and (ii) the opinions provided for in the preceding
sentence, shall be the "Effective Date." On the Effective Date, the Company
shall provide written notice to the Escrow Agent acknowledging that the
Effective Date has occurred and specifying the Automatic Conversion Date (as
defined in the Notes) and shall issue to Middlefield certificates representing
the shares of Class C Convertible Preferred Stock to which it is entitled upon
conversion of the Notes.
7. NEGATIVE COVENANTS.
The Company hereby covenants that as long as any of the Notes remain
outstanding the Company shall and shall cause its Subsidiaries to comply with
the following negative covenants unless such covenant is waived by the holders
of a majority in interest of the Notes, as applicable.
7.1 CONDUCT OF BUSINESS. The Company shall not:
(a) (i) merge or consolidate with or into, or permit any
subsidiary to merge or consolidate with or into, any other Person or
Persons; (ii) reorganize, recapitalize, dissolve or liquidate the
Company, or adopt any plan of reorganization, recapitalization,
dissolution or liquidation of the Company (including, without
limitation, any reorganization into a limited liability company, a
partnership or any other non-corporate entity which is treated as a
partnership for federal income tax purposes, but excluding any stock
split, stock dividend, stock combination or like event); (iii) sell,
lease, assign or otherwise dispose of or
27
<PAGE>
permit any subsidiary to sell, lease, assign or otherwise dispose of,
more than 33-1/3% of the consolidated assets (including, without
limitation, the capital stock of any subsidiaries) of the Company and
its subsidiaries (computed on the basis of the greater of book value,
determined in accordance with generally accepted accounting principles
consistently applied, or fair market value, determined by the
Company's board of directors in its reasonable good faith judgment) in
any transaction or series of related transactions (other than sales of
inventory in the ordinary course of business); or (iv) acquire, or
permit any subsidiary to acquire, any interest in any company or
business (whether by a purchase of assets, purchase of stock, merger
or otherwise), or enter into any joint venture, involving an aggregate
consideration (including, without limitation, the assumption of
liabilities whether direct or indirect) exceeding $500,000 in any
twelve-month period;
(b) directly or indirectly redeem, purchase or otherwise acquire,
or permit any subsidiary to redeem, purchase or otherwise acquire, any
of the Company's or any subsidiary's capital stock or other equity
securities (including, without limitation, warrants, options and other
rights to acquire such capital stock or other equity securities),
other than (i) the Class C Preferred Stock, the Class B Preferred
Stock and Class A Preferred Stock pursuant to the terms of the
Articles of Incorporation, or (ii) repurchases of Common Stock or
options to purchase Common Stock from former employees or consultants
of the Company and its subsidiaries upon termination of employment or
consultancy for an aggregate purchase price of no more than $100,000
in any twelve-month period pursuant to arrangements approved by the
Company's board of directors so long as any such repurchase is made at
a price no greater than such shareholder's cost or (iii) pursuant to
Section 7.9 hereof;
(c) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, (i) any notes or debt
securities containing equity features (including, without limitation,
any notes or debt securities convertible into or exchangeable for
capital stock or other equity securities, issued in connection with
the issuance of capital stock or other equity securities or containing
profit participation features), other than capital stock or other
equity securities issued in connection with bank or equipment lease
financings, (ii) any capital stock or other equity securities (or any
securities convertible into or exchangeable for any capital stock or
other equity securities) which are senior to or on a parity with the
Class C Preferred Stock or Class B Preferred Stock with respect to the
payment of dividends, redemptions or distributions upon liquidation or
otherwise other than upon conversion of any outstanding 6% Convertible
Subordinated Debentures of the Company or upon the issuance of
Preferred Shares and Warrants pursuant to the terms of the License
Agreement between the Company and ATI Technologies, Inc., or (iii) any
additional Preferred Stock of the Company;
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<PAGE>
(d) create, incur, assume or suffer to exist, or permit any
subsidiary to create, incur, assume or suffer to exist, indebtedness
exceeding an aggregate principal amount of $500,000 outstanding at any
time on a consolidated basis;
(e) except as contemplated by this Agreement, amend the Articles
of Incorporation or the bylaws of the Company or file any resolution
of the Board of Directors with the appropriate government authority
containing any provisions which would increase the number of
authorized shares of the Company's Preferred Stock or adversely affect
or otherwise impair the rights or the relative preferences and
priorities of the holders of the Company's Preferred Stock or Common
Stock into which the Company's Preferred Stock is convertible;
(f) effect any material change in the nature of the business of
the Company, or apply the assets of the Company other than for the
conduct of the business of the Company, as such business is conducted
and proposed to be conducted;
(g) make, or permit any subsidiary to make, any loans or advances
to, guarantees for the benefit of, or investments in, any Person
(other than a wholly-owned subsidiary established under the laws of a
jurisdiction of the United States or any of its territorial
possessions), except for reasonable advances to employees and the
issuance of credit terms to customers, in each case, in the ordinary
course of business;
(h) enter into, or permit any subsidiary to enter into, the
ownership, active management or operation of any business other than
the business conducted by the Company or its subsidiaries;
(i) establish or acquire (A) any subsidiaries other than wholly-
owned subsidiaries or (B) any subsidiaries organized outside of the
United States and its territorial possessions;
(j) issue or sell any shares of the capital stock, directly or
indirectly, or rights to acquire shares of the capital stock, of any
subsidiary to any entity other than the Company or a wholly-owned
subsidiary;
(k) increase the size of the current stock option plan or grant
options or warrants to purchase Common Stock in excess of 11,000,000
shares currently outstanding or eligible for issuance under the
Company's Stock Option Plan, 20,384,612 shares granted outside the
Company's Stock Option Plan;
(l) issue or sell any shares of Common Stock for consideration of
less than $1.43 per share; or
(m) effect any stock split, stock dividend, stock combination or
like event.
29
<PAGE>
7.2 LIENS AND ENCUMBRANCES. The Company shall not and shall not
permit any of its subsidiaries to create, assume, or permit to exist any lien,
security interest, pledge or other encumbrance, under conditional or installment
sale arrangements or otherwise, with respect to any of their properties or
assets, whether tangible or intangible, now owned or hereafter acquired, except
for liens for current taxes not delinquent.
7.3 DIVIDENDS. Except to the extent required by the Articles of
Incorporation of the Company, the Company shall not and shall not permit any of
its subsidiaries to declare or pay any dividend payable in cash or other
property or make or authorize any other distribution, directly or indirectly, on
any class of the Company's or any of its subsidiaries' capital stock.
7.4 AGREEMENTS. The Company shall not become subject to, or permit
any of its subsidiaries to become subject to (including, without limitation, by
way of amendment to or modification of) any agreement or instrument which by its
terms would (under any circumstances) restrict (a) the right of any subsidiary
to make loans or advances or pay dividends to, transfer property to, or repay
any indebtedness owed to, the Company or another subsidiary or (b) the Company's
right to perform the provisions of this Agreement, the Articles of Incorporation
or the bylaws of the Company (including, without limitation, provisions relating
to the declaration and payment of dividends on and the making of redemptions of
the Company's Preferred Stock and conversion of the Company's Preferred Stock).
7.5 INSIDER TRANSACTIONS. The Company shall not enter into, amend,
modify or supplement, or permit any subsidiary to enter into, amend, modify or
supplement, any agreement, transaction, commitment or arrangement with any of
its or any of its subsidiary's officers, directors, employees, holders of 5% or
more of the Company's outstanding Common Stock, or other affiliates or with any
individual related by blood, marriage or adoption to any such individual or with
any entity in which any such person or individual owns a beneficial interest in
excess of 5% of the outstanding voting securities of such entity, except for
customary employment arrangements and benefit programs on reasonable terms and
except as otherwise expressly contemplated by this Agreement or as otherwise
approved by the disinterested members of the Company's board of directors, or
increase any compensation (including salary, bonuses and other forms of current
and deferred compensation) payable to any officer or director of the Company or
any subsidiary, except for reasonable increases as approved by the board of
directors of the Company.
7.6 CAPITAL EXPENDITURES. The Company shall not nor shall it permit
any subsidiary to incur, during any calendar year, capital expenditures
(including expenditures for capitalized leases) in excess of $150,000 or any
single capital expenditure in excess of $60,000, unless such expenditures were
explicitly included in an approved budget of the Company.
7.7 PAYMENTS, NO DEFAULT. The Company shall make and shall cause
each of its subsidiaries to make all required payments of rent, taxes, debts and
other material obligations of the Company promptly when due. The Company and
each of its subsidiaries shall not be in default with respect to any material
contracts, agreements or instruments to which any of them is a party or by which
they are bound.
30
<PAGE>
7.8 MATERIAL CONTRACTS. Neither the Company nor any of its
subsidiaries shall, during any fiscal year, enter into material contracts, other
than in the ordinary course of business, pursuant to which the Company or any of
its subsidiaries would incur liabilities in excess of $50,000 individually or
$100,000 in the aggregate, unless the Board of Directors of the Company has
previously approved the execution of such contracts or such contracts were
explicitly included in an approved budget of the Company.
8. FURTHER ASSURANCE.
The Company and the Purchasers agree to execute and deliver all such
other instruments and take all such other actions as any party may reasonably
request from time to time after the date hereof and without payment of further
consideration, in order to effectuate the transactions provided for herein. The
parties shall cooperate fully with each other and with their respective counsel
and accountants in connection with any steps required to be taken as part of
their respective obligations under this Agreement.
9. MISCELLANEOUS.
9.1 WAIVERS AND AMENDMENTS. No waiver by either party of any
condition, or the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
or construed as a further or continuing waiver of any such condition or breach
or a waiver of any other condition. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated other than by an
agreement in writing signed by all of the parties hereto.
9.2 GOVERNING LAW. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the State of California,
notwithstanding any conflict-of-law provisions to the contrary.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, this Agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors and
assigns.
9.4 ENTIRE AGREEMENT. This Agreement and the other documents
delivered in connection with the transactions contemplated hereby or thereby
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and supersedes all prior
agreements, understandings, inducements or conditions, express or implied, oral
or written, except as herein or therein contained. The express terms hereof
control and supersede any course of performance and/or usage of trade
inconsistent with any of the terms hereof.
9.5 NOTICES. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly made and received when personally served,
or when mailed by first class mail or overnight, by courier service such as
Federal Express, postage prepaid, or telecopied with answer back receipt and
hard copy sent in the manner set forth above, addressed as set forth below:
i. If to the Company, then to:
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<PAGE>
Quadrant International, Inc.
269 Great Valley Parkway
Malvern, PA 19355
Telecopier No.: (610) 695-2592
Attn: President
with a copy, given in the manner prescribed above, to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telecopier: (650) 496-2733
Attn: Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
ii. If to a Purchaser, to the address set forth immediately
below such Purchaser's name on the Execution Pages:
with a copy, given in the manner prescribed above to:
Gibson, Dunn & Crutcher, LLP
333 South Grand Avenue
Los Angeles, California 90071
Telecopier: (213) 229-7520
Attn: Bradford P. Weirick, Esq.
Any party may alter the address to which communications are to be sent by giving
notice of such change of address in conformity with the provisions of this
Section providing for the giving of notice.
9.6 PAYMENT OF EXPENSES. The Company will pay expenses of the
Purchaser in connection with this Transaction in the aggregate amount of $15,000
shall be paid by the Company promptly upon the Closing in accordance with wire
instructions provided by the Purchaser.
9.7 BROKERS. Each party represents that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement and neither party is under any obligation to pay any finder's or
broker's fee in connection herewith. Each party will indemnify, defend and hold
the other party harmless from any claim based on breach of this representation.
9.8 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy upon any breach or default of the other
party under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach or default, or any
acquiescence therein, or of any similar breach or default thereafter occurring;
nor shall any waiver of any single breach or default be deemed a waiver of any
other
32
<PAGE>
breach or default theretofore or thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character of
any breach or default under this Agreement, or any waiver of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing, and that all remedies, either
under this Agreement or by law or otherwise, shall be cumulative and not
alternative.
9.9 TITLES. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
9.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
9.11 EXECUTION; COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
9.12 EXHIBITS; SCHEDULES. All Exhibits and Schedules attached hereto
are hereby incorporated by reference into, and made a part of, this Agreement.
9.13 DEFINITIONS. For the purposes of this Agreement, the following
terms shall have the respective meanings set forth below:
"Affiliate" of any Person means any other Person that directly or
---------
indirectly through one or more intermediaries controls, is controlled by or
under common control with such Person. For purposes of this definition,
"control" (or "controlled", as the context may require) shall have the meanings
set forth in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
"Code" means the Internal Revenue Code of 1986, as amended, and any
----
reference to any particular Code section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"Contract" means all written or oral contracts, agreements,
--------
undertakings, indentures, notes, debentures, bonds, loans, instruments, leases,
mortgages, commitments or other binding arrangements.
"Governmental Entity" means any federal, state, local or foreign
-------------------
government, political subdivision, legislature, court, agency, department,
bureau, commission or other governmental or regulatory authority, body or
instrumentality, including any industry or other non-governmental self-
regulatory organizations.
"Indebtedness" means at a particular time, without duplication, (i)
------------
any indebtedness for
33
<PAGE>
borrowed money or issued in substitution for or exchange of indebtedness for
borrowed money, (ii) any indebtedness evidenced by any note, bond, debenture or
other debt security, (iii) any indebtedness for the deferred purchase price of
property or services with respect to which a Person is liable, contingently or
otherwise, as obligor or otherwise (other than trade payables and other current
liabilities incurred in the ordinary course of business which are not more than
six months past due), (iv) any commitment by which a Person assures a creditor
against loss (including, without limitation, contingent reimbursement
obligations with respect to letters of credit), (v) any indebtedness guaranteed
in any manner by a Person (including, without limitation, guarantees in the form
of an agreement to repurchase or reimburse), (vi) any obligations under
capitalized leases with respect to which a Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or with respect to which
obligations a Person assures a creditor against loss, (vii) any indebtedness
secured by a Lien on a Person's assets and (viii) any unsatisfied obligation for
"withdrawal liability" to a "multiemployer plan" as such terms are defined under
ERISA.
"Intellectual Property Rights" means all (i) patents, patent
----------------------------
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registrations
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data, data bases and documentation thereof, (vi)
trade secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights and (viii) copies and tangible
embodiments thereof (in whatever form or medium).
"Lien or Encumbrance" means any lien, pledge, mortgage, security
-------------------
interest, claim, lease, charge, option, right, easement, servitude, transfer
limit, restriction, title defect or other encumbrance of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof, any sale of receivables with recourse against the
Company or any Affiliate thereof, any filing or agreement to file a financing
statement as debtor under the Uniform Commercial Code or any similar statute, or
any subordination arrangement in favor of another Person).
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint stock company, trust,
unincorporated organization, Governmental Entity, or other entity or
organization.
"Property or Properties" means any real, personal or mixed property,
----------------------
whether tangible or intangible.
34
<PAGE>
(SIGNATURE PAGE TO FOLLOW)
35
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
QUADRANT INTERNATIONAL, INC.
/s/ Frank Wilde
By:______________________________________
Frank Wilde, Chief Executive Officer
Date: 4/28/99
Time: 11:45 AM PST
36
<PAGE>
PURCHASER SIGNATURE PAGE
MIDDLEFIELD VENTURES, INC.
/s/ Arvind Sodhani
By:______________________________
Arvind Sodhani
Name:____________________________
Treasurer
Title:___________________________
Address:_________________________
_________________________
ADDRESS TO WHICH SECURITIES SHOULD BE SENT IF DIFFERENT FROM ABOVE:
_________________________________
_________________________________
_________________________________
AGGREGATE SUBSCRIPTION AMOUNT:
Amount of Notes: $4,716,000
Aggregate Purchase Price: $3,000,000
DATE: April 28, 1999
37
<PAGE>
EXECUTION COPY
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT
BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SUCH ACT AND SUCH LAWS.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$4,716,00 - Principal Amount Issue Date - April 27, 1999
FOR VALUE RECEIVED, Quadrant International, Inc., a Pennsylvania corporation
(the "Company"), hereby promises to pay to the order of Middlefield Ventures,
Inc. (the "Lender"), in accordance with the terms hereof, the principal sum of
Four Million Seven Hundred Sixteen Thousand Dollars ($4,716,000), with no
interest thereon. The Lender may at any time upon written notice to the Company
demand repayment in full of all outstanding principal hereunder. Principal shall
be due and payable in full upon the earlier of Lender's demand or on April 27,
2004, the fifth anniversary of the issue date of this Note.
All payments shall be made in lawful money of the United States of America at
the principal office of the Company, or at such other place as the holder hereof
may from time to time designate in writing to the Company. This Note may be
prepaid or any demand for payment hereof by Lender may be satisfied by the
transfer to Lender by Escrow Agent (as defined in that certain Convertible
Promissory Note Purchase Agreement of even date herewith between the Company and
the Lender (the "Note Purchase Agreement")) of the outstanding principal
hereunder and any income earned thereon pursuant to that certain Escrow
Agreement of even date herewith among the Company, the Lender and Escrow Agent.
In addition to any right of payment under the Escrow Agreement, Lender will have
full recourse against any tangible or intangible assets of the Company and may
pursue any legal or equitable remedies that are available.
The principal amount of this Note automatically will convert into Class C
Convertible Preferred Stock ("Class C Preferred Stock") of the Company upon the
first business day following the Effective Date (as defined in the Note Purchase
Agreement) (the "Automatic Conversion Date"). On such date, subject to the
conditions set forth herein and in the Escrow Agreement, this Note shall be
deemed cancelled and the Lender shall receive shares of Class C Preferred Stock,
as provided below.
The rights, preferences and privileges of the Class C Preferred Stock shall be
as set forth in the Articles, that certain Registration Rights Agreement between
the Company, the Lenders and the other parties therein dated as of the date
hereof and that certain Amended and Restated Shareholders' Agreement between the
Company, the Lenders and the other parties therein dated as of the date hereof.
On the Effective Date, the Company shall deliver written notice to the Lender,
notifying the Lender of the Automatic Conversion Date and the number of Shares
Lender will be entitled to receive upon conversion of this Note into Class C
Preferred Stock (the "Conversion Shares"). The initial conversion
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<PAGE>
price shall be $1.43 per share (the "Conversion Price"). The number of shares
issuable upon conversion of this Note shall be determined by dividing the
principal amount due and payable hereunder by the Conversion Price in effect on
the Automatic Conversion Date. Lender promptly shall give written notice to the
Company regarding the name or names in which the Conversion Shares shall be
issued upon conversion of this Note if different from the Lender. If the Company
does not receive such notice prior to the Automatic Conversion Date, this Note
will be converted into Conversion Shares held in Lender's name. Such conversion
will take place on the Automatic Conversion Date at which time (i) the Company
will issue to the Lender or its designee certificates representing the
Conversion Shares to which it is entitled and (ii) Lender shall surrender the
Note, duly endorsed, to the Company.
The Company shall reserve, at all times prior to conversion or repayment in full
of this Note, such securities as Lender is entitled to receive upon conversion
of this Note. Prior to the issuance of any such securities, the Company will
amend its Articles of Incorporation to ensure that it has authorized the
quantity of such securities that are issuable upon conversion of this Note (and
the quantity of Common Stock which are issuable upon conversion of such
securities).
Upon conversion of this Note, the Company shall issue the Conversion Shares to
the Lender or his designees, provided that the Company shall not issue any
fractional Conversion Shares. In lieu of the Company issuing any fractional
Conversion Shares to the Lender upon the conversion of this Note, the Company
shall pay to the Lender the unconverted amount of the Note, such payment to be
in the form of a Company check payable to the Lender. The Company shall deliver
to the Lender or his designees a certificate or certificates representing such
Conversion Shares upon surrender of this Note by the Lender. Such conversion
shall be deemed to have been made on the Automatic Conversion Date, and the
person or persons entitled to the Conversion Shares upon such conversion shall
be treated for all purposes as the record holder or holders of such Conversion
Shares as of such Automatic Conversion Date. Upon conversion of this Note, the
Company shall be forever released from all its obligations and liabilities under
this Note.
This Note shall be governed by and construed in accordance with the laws of the
State of California as applied to agreements among California residents entered
into and to be performed entirely within California, without respect to State of
California choice of law provisions.
The Company hereby agrees, subject only to any limitation imposed by applicable
law, to pay all expenses, including, without limitation, reasonable attorneys'
fees and legal expenses, incurred by the holder of this Note in endeavoring to
collect any amounts payable hereunder which are not paid when due, whether by
declaration or otherwise.
For purposes of this Note, a "Regulatory Problem" means any set of facts or
circumstances wherein it has been asserted by any governmental regulatory agency
that the Lender is not entitled to hold, or exercise any significant right with
respect to, the equity securities of the Company then held by the Lender. If
Lender determines that it has a Regulatory Problem, the Lender will so notify
the Company as soon as practicable in writing. After giving such notice, the
Lender will have the right to transfer this Note and the Company will take all
such actions as are reasonably requested by the Lender in order to (i)
effectuate and facilitate the transfer by the Lender of this Note to any person
designated by the Lender, in good faith, who must be acceptable the Company in
the reasonable and good faith judgment of the Company's Board of Directors, and
(ii) amend, and use its reasonable efforts to cause other relevant parties,
including without limitation the Company's shareholders, to take such actions as
are legally required in order to effectuate and reflect the foregoing.
Notwithstanding the provisions set forth above, the entire unpaid principal
amount of this Note, together with all accrued but unpaid interest to date,
shall become immediately due and payable upon the occurrence of any of the
following events:
(a) The insolvency of the Company, the commission of any act of
bankruptcy by the Company, the execution by the Company of a general
assignment for the benefit of creditors, the filing by or against the
Company of any petition in bankruptcy or any petition for relief under
the provisions of the Federal Bankruptcy Act or any other state or
federal
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law for the relief of debtors and the continuation of such petition
without dismissal for a period of twenty (20) days or more, the
appointment of a receiver or trustee to take possession of any
property or assets of the Company, or the attachment of or execution
against any property or assets of the Company; or
(b) The merger or consolidation of the Company with any other entity,
a sale of substantially all of the Company's assets to a third party
or any similar transaction.
This Note shall be binding upon and inure to the benefit of the Lender and its
successors and assigns.
The Company hereby waives presentment, demand, protest, notice of dishonor,
diligence and all other notices, any release or discharge arising from any
extension of time, discharge of a prior party, release of any or all of any
security given from time to time for this Note, or other cause of release or
discharge other than actual payment in full hereof.
Lender shall not be deemed, by any act or omission, to have waived any of its
rights or remedies hereunder unless such waiver is in writing and signed by
Lender and then only to the extent specifically set forth in such writing. Any
waiver with reference to one event shall not be construed as continuing or as a
bar to or waiver of any right or remedy as to a subsequent event. No delay or
omission of Lender to exercise any right, whether before or after a default
hereunder, shall impair any such right or shall be construed to be a waiver of
any right or default, and the acceptance at any time by Lender of any past due
amount shall not be deemed to be a waiver of the right to required prompt
payment when due of any other amounts then or thereafter due and payable.
Time is of the essence hereof. Upon any default hereunder, Lender may exercise
all rights and remedies provided for herein and by law or equity, including, but
not limited to, the right to immediate payment in full of this Note.
The remedies of Lender as provided herein, or any one or more of them, or in law
or in equity, shall be cumulative and concurrent, and may be pursued singularly,
successively or together at Lender's sole discretion, and may be exercised as
often as occasion therefor shall occur.
It is expressly agreed that if suit is brought to collect or interpret this Note
or any part hereof or to enforce or protect any rights conferred upon Lender by
this Note or any other document evidencing or securing this Note, then the
Company agrees to pay all costs, including attorney's fees, incurred by Lender.
This Note shall be governed by and construed in accordance with laws of the
State of California applicable to contracts wholly made and preformed in the
State of California.
QUADRANT INTERNATIONAL, INC.
By:
Its:
INTEL CORPORATION:
Name:
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Signature:
Name:
Title:
Address:
DATE: April 27, 1999
4 of 4
<PAGE>
EXHIBIT 4.15
EXECUTION COPY
QUADRANT INTERNATIONAL, INC.
---------------------------------------
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
---------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Registration Rights................................................. 1
1.1 Definitions................................................... 1
1.2 Request for Registration...................................... 2
1.3 Company Registration.......................................... 4
1.4 Obligations of the Company.................................... 4
1.5 Furnish Information........................................... 6
1.6 Expenses of Demand Registration............................... 6
1.7 Expenses of Company Registration.............................. 7
1.8 Underwriting Requirements..................................... 7
1.9 Delay of Registration......................................... 7
1.10 Indemnification............................................... 8
1.11 1934 Act...................................................... 10
1.12 Form S-3 Registration......................................... 10
1.13 Assignment of Registration Rights............................. 11
1.14 Limitations on Subsequent Registration Rights................. 12
1.15 "Market Stand-Off" Agreement.................................. 12
1.16 Nasdaq National Market........................................ 13
2. Miscellaneous....................................................... 13
2.1 Termination................................................... 13
2.2 Successors and Assigns........................................ 13
2.3 Prior Agreement............................................... 13
2.4 Governing Law................................................. 13
2.5 Counterparts.................................................. 13
2.6 Titles and Subtitles.......................................... 14
2.7 Notices....................................................... 14
2.8 Expenses...................................................... 14
2.9 Amendments and Waivers........................................ 14
2.10 Severability.................................................. 14
2.11 Aggregation of Stock.......................................... 14
2.12 Entire Agreement.............................................. 14
</TABLE>
i
<PAGE>
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
--------------------------------------------------
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT is made as of
the 27th day of April, 1999, by and among Quadrant International, Inc., a
Pennsylvania corporation (the "Company"), and the parties listed on Schedule A
----------
hereto (collectively, the "Investors").
RECITALS
--------
WHEREAS, certain of the Investors hold securities of the Company and
possess certain registration rights with respect to such securities (the
"Existing Investors"); and
WHEREAS, the Existing Investors desire to terminate the registration
rights previously granted to them and to accept the rights created pursuant
hereto in lieu of such previously granted rights; and
WHEREAS, the Investors are parties to the Convertible Promissory Note
Purchase Agreement dated as of even date herewith among the Company and the
Investors (the "Purchase Agreement"), and certain of the Company's and such
Investors' obligations under the Purchase Agreement are conditioned upon the
execution of this Agreement by such Investors, the Existing Investors and by the
Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Existing Investors hereby agree that any and all
registration rights previously granted to them shall be superseded and replaced
in its entirety by this Agreement, and the parties hereto hereby further agree
as follows:
1. REGISTRATION RIGHTS. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(c) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(d) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(e) The term "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
<PAGE>
(f) The term "Registrable Securities" means (i) Common Stock
issuable or issued upon conversion of the Class A Convertible Preferred Stock of
the Company, (ii) Common Stock issuable or issued upon conversion of the Class B
Convertible Preferred Stock of the Company and upon exercise of warrants issued
to the holders of Class B Convertible Preferred Stock of the Company, (iii)
Common Stock issuable or issued upon conversion of the Series C Convertible
Preferred Stock of the Company, (iv) Common Stock issuable or issued upon
conversion of the Company's 6% Convertible Subordinated Debentures and upon
exercise of warrants issued to the holders of such debentures, (v) for purposes
of Section 1.3 only, up to 6,017,810 shares of Common Stock held by Gregg
Garnick ("Garnick"), (vi) for purposes of Section 1.3 only, up to 250,000 shares
of Common Stock held by each of Hendrick Horak, Ulrich Sigmund and Jorg
Ringelberg (collectively, the "Viona Employees"), and (vii) any Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the shares
referenced in (i), (ii), (iii), (iv), (v) and (vi) above, excluding in all
cases, however, any Registrable Securities sold pursuant to one or more
registration statements under the Act, or which are saleable pursuant to Rule
144(k) under the Act, or which have been sold by a person in a transaction in
which such person's rights under this Section 1 are not assigned.
(g) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities.
(h) The term "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive at any time after the effective date
of the first registration statement for a public offering of securities of the
Company and after the Company qualifies for registering securities on a Form S-3
(other than a registration statement relating either to the sale of securities
to employees of the Company pursuant to a stock option, stock purchase or
similar plan or a SEC Rule 145 transaction), a written request from the Holders
of at least (i) sixty-seven percent (67%) of the Registrable Securities then
outstanding or (ii) a majority in interest of the Class C Preferred Stock, that
the Company file a registration statement under the Act covering the
registration of at least twenty percent (20%) of the Registrable Securities then
held by such Holders then the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and
(ii) file such registration within 30 days of the mailing of such
notice by the Company in accordance hereof and cause such registration to
be effective as soon as practicable under the Act of all Registrable
Securities which the Holders request to be registered, subject to the
limitations of subsection 1.2(b).
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<PAGE>
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 1.2(a) and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Holder to include such Holder's Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities issued or issuable upon
conversion of the Class A Preferred Stock, the Class B Preferred Stock and the
Class C Preferred Stock of the Company to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from the
underwriting.
(c) The Company may include in a registration requested under Section
1.2(a) any additional authorized shares of the Common Stock of the Company,
whether or not issued, for sale by the Company; provided, however, that such
shares shall not be included to the extent that the Holders of a majority of the
shares of Registrable Securities held by the Investors included therein
determine in good faith that the inclusion of such shares will interfere with
the successful marketing of the shares of Registrable Securities to be included
therein; and provided, further, that if the number of shares to be so included
equals or exceeds the number of shares of Registrable Securities included
therein by the holders of Registrable Securities, such registration shall be
deemed to be a registration pursuant to Section 1.3 hereof.
(d) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2 or
Section 1.12, a certificate of the Company signed by the Chief Executive Officer
of the Company stating that in the good faith judgment of the Board of Directors
of the Company, the filing of such registration statement would (A) interfere
with or affect the negotiation or completion of any material transaction that is
being contemplated by the Company or (B) involve initial or continuing
disclosure obligations materially adverse to the best interests of the Company's
shareholders, and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than sixty (60) days after
receipt of the request of the Initiating Holders; provided, however, that the
Company may not utilize this right more than once in any twelve-month period,
and the time periods referred to in
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<PAGE>
this Section 1.2 or Section 1.12 shall be extended for an additional number of
business days during which the rights to sell shares were suspended.
(e) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two registrations pursuant to
this Section 1.2 and such registrations have been declared or ordered
effective; or
(ii) During the period ending on a date six (6) months after the
effective date of a registration subject to Sections 1.2 or 1.3 hereof.
1.3 Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities which are
also being registered or covering only securities proposed to be issued in
exchange for securities or assets of another corporation or an SEC Rule 145
transaction), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 2.6, the Company shall, subject to the provisions of
Section 1.8, use its best efforts to cause to be registered under the Act all of
the Registrable Securities that each such Holder has requested to be registered.
In no event, however, shall any holder of registration rights be granted
registration rights under this Section 1.3 that are superior to the registration
rights of the Holders without the written consent of the holders of at least 50%
of the Registrable Securities.
1.4 Obligations of the Company. Whenever required under this Section
--------------------------
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder with respect
to a registration under Sections 1.2 and 1.12, keep such registration statement
effective for the period necessary (but, other than as provided below, in no
event more than nine (9) months) to complete the proposed public offering;
provided, however, that (i) such nine (9)-month period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, but for not more than a period of two (2) years, to keep the
registration statement effective until all such
4
<PAGE>
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Act, permits an offering on a continuous or delayed basis, and
provided further that applicable rules under the Act governing the obligation to
file a post-effective amendment permit, in lieu of filing a post-effective
amendment which (i) includes any prospectus required by Section 10(a)(3) of the
Act or (ii) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (i) and
(ii) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to (i) qualify to do business as a foreign corporation or (ii)
to file a general consent to service of process in any such states or
jurisdictions, unless the Company is already subject to service in such
jurisdiction, or (iii) register in any state requiring, as a condition to
registration, escrow or surrender of any Company securities.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing. If, in
such event, the Company advises the Holders of the Registrable Securities
covered by such registration statement that the Company considers it appropriate
for the registration statement to be amended, the Holders of such securities
shall suspend any further sales of their registered shares until the Company
advises them that the registration statement has been amended and the Company
has delivered revised prospectuses to the selling Holders (the selling Holders
shall promptly return to the Company all prior prospectuses). The time periods
referred to in this Section 1 shall be extended for an additional number of
business days during which the rights to sell shares was suspended.
5
<PAGE>
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.6 Expenses of Demand Registration. All expenses, other than
-------------------------------
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, and fees and disbursements of one counsel for the Holders
shall be borne by the Company; provided, however, that if a registration is
withdrawn at the request of the Holders requesting such registration (other than
as a result of information concerning a material adverse change to the business
or financial condition of the Company which is made known to the Holders after
the date on which such registration was requested) and if the requesting Holders
elect not to have such registration counted as a registration requested under
Section 1.2, the requesting Holders shall pay all of the expenses referred to
above of such registration pro rata in accordance with the number of their
Registrable Securities included in such registration in relation to the number
of shares of the Company and of others which were included in the registration.
1.7 Expenses of Company Registration. The Company shall bear and pay
--------------------------------
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration,
6
<PAGE>
filing and qualification fees, printers and accounting fees and fees and
disbursements of one counsel for the Holders relating or apportionable thereto
selected by them, but excluding solely underwriting discounts and commissions
relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by shareholders to be
included in such offering exceeds the amount of securities sold that the
underwriters determine in their sole discretion is compatible with the success
of the offering, then the Company shall be required to include in the offering
only that number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the offering (the securities so included to be reduced, first, pro rata among
the holders of capital stock in their entirety, if necessary other than the
Holders; second, if necessary, the shares held by Garnick and the Viona
Employees pro rata; third, if necessary, among any other of the Holders other
than the holders of Class A Preferred Stock, Class B Preferred Stock and Class C
Preferred Stock; fourth, if necessary, pro rata among the Holders of the Class A
Preferred Stock, the Class B Preferred Stock and the Class C Preferred Stock of
the Company; next and lastly, if necessary, among the Company's shares requested
by the Company to be registered). For purposes of the preceding parenthetical
concerning apportionment, for any selling shareholder which is a holder of
Registrable Securities and which is a partnership or corporation, the partners,
retired partners and shareholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
shareholder", and any pro-rata reduction with respect to such "selling
shareholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling shareholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) The Company will indemnify and hold harmless each Holder, any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act or the 1934
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission
7
<PAGE>
or alleged omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein not misleading, or (iii)
any violation or alleged violation by the Company of the Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Act, the
1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity obligations of the Company contained in this subsection
1.10(a) shall not apply (x) to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), (y)
in any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person, and (z) with respect to a Violation contained in or with
respect to a preliminary prospectus if a copy of the amended or supplemental
preliminary prospectus, or the final prospectus, shall have been delivered or
sent to such person within the time required by the Act, and the Violation was
corrected in such amended or supplemental preliminary prospectus or final
prospectus.
(b) Each selling Holder will indemnify and hold harmless the Company,
each of its directors, each of its officers, each person, if any, who controls
the Company within the meaning of the Act or the 1934 Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will pay any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement of the Company contained in this
subsection 1.10(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld; and
provided further, the total amount for which any Holder shall be liable shall
not in any event exceed the lesser of (A) aggregate net proceeds received by
such Holder from the sale of Registrable Securities held by such Holder in such
registration and (B) in the event that the underwriter shall require joint and
several liability of the selling Holders, that portion of aggregate losses,
claims, damages, liabilities or expenses indemnified against as is equal to the
proportion of the total number of Registrable Securities being sold by such
Holder to the total number of shares of Common Stock being sold by the Company
and all persons for which shares are registered in such offering; and provided
further, however, that no Holder shall be required to enter into an Underwriting
Agreement that provides for any greater potential liability than as set forth
herein.
8
<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties (the consent of the indemnified party to such
counsel not to be unreasonably withheld); provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section
1.10 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.11 1934 Act. With a view to making available to the Holders the
--------
benefits of Rule 144 promulgated under the Act and any other rule or regulation
of the SEC that may at any time permit a Holder to sell securities of the
Company to the public without registration or pursuant to a registration on Form
S-3, the Company agrees to:
9
<PAGE>
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from any
---------------------
Holder or Holders holding at least fifty percent (50%) of the Registrable
Securities then outstanding a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders but in no event less than 25% of each of the originally issued Class
B Preferred Stock and the originally issued Series C Preferred Stock, the
Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) effect, as soon as practicable, such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Company
shall furnish to the Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, the filing of such Form S-3 Registration would (A) interfere with or
affect the negotiation or completion of any material transaction that is being
contemplated by the Company or (B) involve initial or
10
<PAGE>
continuing disclosure obligations materially adverse to the best interests of
the Company's shareholders, and it is therefore essential to defer the filing of
such registration statement, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than sixty (60) days after receipt of the request of the Holder or Holders under
this Section 1.12; provided, however, that the Company shall not utilize this
right more than once in any twelve (12) month period; or (3) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with a registration
requested pursuant to Section 1.12, including (without limitation) all
registration, filing, qualification, printer's and accounting fees and the fees
and disbursements of one counsel for the Holders, but excluding solely any
underwriters' discounts or commissions, shall be borne by the Company.
Registrations effected pursuant to this Section 1.12 shall not be counted as
demands for registration or registrations effected pursuant to Sections 1.2 or
1.3.
(d) The Company shall not be obligated to effect any registration
pursuant to this Section 1.12 if the Company delivers to the Holders requesting
registration under this Section 1.12 an opinion, in form and substance
acceptable to such Holders, of counsel satisfactory to such Holders, that the
Registrable Securities so requested to be registered may be sold or transferred
pursuant to Rule 144(k) under the Act.
1.13 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned by a Holder to a transferee or assignee of such securities provided
that the Company is given a written notice at the time of or within a reasonable
time after such transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes the obligations of such
Holder under this Section 1.
1.14 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company which would allow such holder or prospective holder (a) to include
such securities in any registration filed under Section 1.2 hereof, unless under
the terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of
such holder's securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or within
one hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.
11
<PAGE>
1.15 "Market Stand-Off" Agreement. Each Investor and Existing Investor
----------------------------
hereby agrees that, during the period of duration specified by the Company and
an underwriter of Common Stock or other securities of the Company, following the
effective date of a registration statement of the Company filed under the Act,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it at any time during such period except
Common Stock included in such registration; provided, however, that:
(a) such agreement shall be applicable as to the period immediately
following the first such registration statement of the Company which covers
Common Stock to be sold on its behalf to the public in an underwritten offering;
(b) all officers, directors and founders of the Company, all then
existing two percent or greater shareholders of the Company and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into similar agreements; and
(c) such market stand-off time period shall not exceed one hundred
eighty (180) days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor and Existing Investor (and the shares or securities of every other
person subject to the foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-l or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms which may be promulgated in the future.
1.16 Nasdaq National Market. As promptly as possible following receipt
----------------------
of a written request therefor from the holders of 50% of the outstanding
Registrable Securities at any time while the Company either (a) is subject to
periodic reporting pursuant to Section 15(d) of the Exchange Act or (b) has 500
or more shareholders of record, the Company shall register its Common Stock
under Section 12 of the 1934 Act and arrange for its Common Stock to be listed
on a national stock exchange or included for quotation on the Nasdaq National
Market, as requested, and shall keep effective such registration and maintain
such listing or inclusion.
2. MISCELLANEOUS.
-------------
2.1 Termination. This Agreement shall terminate and be of no further
-----------
force or effect without any action of the parties hereto on April 27, 2006.
2.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable
12
<PAGE>
Securities). Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
2.3 Prior Agreement. Effective upon the execution and delivery of
---------------
this Agreement by all parties hereto, any and all registration rights granted to
the Existing Investors prior to the date hereof shall be terminated and shall be
of no further force and effect and shall be superseded and replaced by this
Agreement.
2.4 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California.
2.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.6 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.7 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
2.8 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
2.9 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Registrable Securities then outstanding; provided however that no amendment or
waiver that materially adversely affects the rights of the holders of the Class
A Preferred Stock, the Class B Preferred Stock or the Class C Preferred Stock
shall be made without the consent of a majority of the class of securities so
affected. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.
2.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
13
<PAGE>
2.11 Aggregation of Stock. All shares of Registrable Securities held
--------------------
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
2.12 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
[Remainder of this page intentionally left blank]
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
QUADRANT INTERNATIONAL, INC.
By: /s/ Francis E. J. Wilde III
-------------------------------------
Francis E. J. Wilde III
President and Chief Executive Officer
Date 4/28/99
Time: 11:45 AM PST
INVESTORS:
NEPA VENTURE FUND II, L.P.
By: NEPA II Management Partners, L.P.,
its General Partner
By: NEPA Management Corporation,
its General Partner
By: /s/ Frederick Beste III
--------------------------------------
Name: Frederick Beste III
--------------------------------
Title: President
-------------------------------
ATLANTIC COASTAL VENTURES, L.P.
By: Atlantic Coastal, L.P.,
its General Partner
By: /s/ Walter L. Threadgill
--------------------------------------
Name: Walter L. Threadgill
--------------------------------
Title: General Partner
-------------------------------
<PAGE>
LAMBROS, L.P.
By: CJ Capital Management, LLC
By: /s/ C. Dennis Kemper
---------------------------------
Name: C. Dennis Kemper
---------------------------
Title: Senior Vice President
--------------------------
ATI TECHNOLOGIES, INC.
By: ________________________________
Name:___________________________
Title:__________________________
EXETER CAPITAL PARTNERS IV, L.P.
By: Exeter IV Advisors, L.P.
By: Exeter IV Advisors, Inc.
By: ________________________________
Name:___________________________
Title:__________________________
APAX GERMANY II, L.P.
By: /s/ Richard P. Rich
---------------------------------
Name: Richard P. Rich
---------------------------
Title: Director
--------------------------
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA Excelsior IV Partners, L.P., its
General Partner
By: Patricof & Co. Managers, Inc., its
General Partners
By: /s/ Robert Chefitz
------------------------------------
Name: Robert Chefitz
------------------------------
Title: Vice President
------------------------------
APA EXCELSIOR IV, L.P.
By: APA Excelsior IV Partners, L.P., its
General Partner
By: Patricof & Co. Managers, Inc., its
General Partners
By: /s/ Robert Chefitz
--------------------------------
Name: Robert Chefitz
---------------------------
Title: Vice President
--------------------------
COUTTS & CO. (CAYMAN) LTD. CUSTODIAN
FOR APA EXCELSIOR IV/OFFSHORE
By: Patricof & Co. Managers, Inc., its
Investment Advisor
By: /s/ Robert Chefitz
--------------------------------
Name: Robert Chefitz
--------------------------
Title: Managing Director
-------------------------
THE P/A FUND III, L.P.
By: APA Pennsylvania Partners, L.P., its
General Partners
By: Patricof & Co. Managers, Inc., its
General Partners
By: /s/ Robert Chefitz
--------------------------------
Name: Robert Chefitz
--------------------------
Title: Vice President
-------------------------
<PAGE>
/s/ John Akers
--------------------------------------
JOHN AKERS
/s/ Samuel Frankel
--------------------------------------
SAMUEL FRANKEL
/s/ James Collander
--------------------------------------
JAMES COLLANDER
/s/ John Macomber
---------------------------------------
JOHN MACOMBER
/s/ William B. Macomber II
----------------------------------------
WILLIAM B. MACOMBER II
/s/ Elizabeth Macomber
----------------------------------------
ELIZABETH MACOMBER
/s/ Janet Macomber Williamson
----------------------------------------
JANET MACOMBER WILLIAMSON
<PAGE>
/s/ Ulrich Sigmund
--------------------------------------
ULRICH SIGMUND
/s/ Hendrik Horak
--------------------------------------
HENDRIK HORAK
/s/ Joerg Ringelberg
--------------------------------------
JOERG RINGELBERG
<PAGE>
INTEL CORPORATION
/s/ Arvind Sodhani
By: ________________________________
Arvind Sodhani
Name:___________________________
Treasurer
Title:__________________________
<PAGE>
SCHEDULE A
----------
<PAGE>
EXHIBIT 10.1
DIVICORE INC.
1999 STOCK INCENTIVE PLAN
-------------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Divicore Inc., a Delaware corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary), and
(iii) the Automatic Option Grant Program under which
eligible non-employee Board members shall automatically receive options at
periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The following provisions shall govern the administration of the
Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part to
the Primary Committee.
<PAGE>
(ii) Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain the
power to administer those programs with respect to all such persons.
(iii) Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate
for proper administration of the Plan, to make all factual determinations,
to construe and interpret the provisions of the Plan and the awards
thereunder and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards are
to be made, the number of shares to be covered by each such award, the
vesting schedule (if any) applicable to the award, the status of a granted
option as either an Incentive Option or a Non-Statutory Option and the
maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with
the consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
2
<PAGE>
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
______________________________ (____________). Such authorized share reserve
consists of (i) the number of shares estimated to be available for issuance, as
of the Plan Effective Date, under the Predecessor Plan as last approved by the
Corporation's stockholders, including the shares subject to the outstanding
options to be incorporated into the Plan and the additional shares which would
otherwise be available for future grant, plus (ii) an increase of approximately
___________________________ (_____________) additional shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2000 calendar year, by an
amount equal to one percent (1%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed _____________________ (__________) shares.
C. No one person participating in the Plan may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances for more than _____________________ (_________________) shares of
Common Stock in the aggregate per calendar year, beginning with the 1999
calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common
3
<PAGE>
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under the Plan shall NOT be available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the maximum number of securities by which the share reserve is to
increase each calendar year pursuant to the automatic share increase provisions
of the Plan, (iii) the number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances under this Plan per calendar year, (iv) the number
and/or class of securities for which grants are subsequently to be made under
the Automatic Option Grant Program to new and continuing non-employee Board
members, (v) the number and/or class of securities and the exercise price per
share in effect under each outstanding option under the Plan and (vi) the number
and/or class of securities and price per share in effect under each outstanding
option incorporated into this Plan from the Predecessor Plans. Such adjustments
to the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section II of Article Five
and the documents evidencing the option, be payable in one or more of the
following forms:
(i) in cash or check made payable to the Corporation,
4
<PAGE>
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. CESSATION OF SERVICE.
--------------------
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death
may be subsequently exercised by his or her Beneficiary to the extent that
option is exercisable for one or more vested shares at the time of
Optionee's death.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
5
<PAGE>
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service to such
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust in which the Optionee and/or one or more such
family members have more than a fifty percent (50%) of the beneficial interest
or to any other entity in which the Optionee and/or one or more such family
members own more than fifty percent (50%) of the voting interests. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
Notwithstanding the foregoing, the Optionee may also designate a Beneficiary or
Beneficiaries of his or her outstanding options under this Article Two, and
those options shall, in accordance with such designation, be automatically
transferred to such Beneficiary or Beneficiaries upon Optionee's death while
holding those options. Such Beneficiary or Beneficiaries shall take the
transferred options subject to the all the terms and conditions of the
applicable agreement evidencing each
6
<PAGE>
such transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to
-----------
Employees.
B. EXERCISE PRICE. The exercise price per share shall not be
--------------
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
-----------------
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option
---------------
is granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control
but not otherwise fully-vested shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in
7
<PAGE>
the event of any Change in Control, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) or
otherwise continue in full force and effect pursuant to the terms of the Change
in Control or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. In addition, the Plan Administrator may at any time
provide that one or more of the Corporation's repurchase rights shall not be
assignable in connection with such Change in Control and shall terminate upon
the consummation of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term. In addition, the Plan Administrator may at any time provide
that one or more of the Corporation's repurchase rights shall immediately
terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan
8
<PAGE>
Administrator may condition such automatic acceleration and termination upon an
Involuntary Termination of the Optionee's Service within a designated period
(not to exceed eighteen (18) months) following the effective date of such
Hostile Take-Over. Each option so accelerated shall remain exercisable for
fully-vested shares until the expiration or sooner termination of the option
term.
H. The portion of any Incentive Option accelerated in connection with
a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a Non-
Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening options. Shares
of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share of Common Stock subject to direct
issuance shall be fixed by the Plan Administrator.
2. Subject to the provisions of Section II of Article Five,
Shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
9
<PAGE>
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
---------------------------
1. The Plan Administrator may issue shares of Common Stock which
are fully and immediately vested upon issuance or which are to vest in one or
more installments over the Participant's period of Service or upon attainment of
specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is vested. Accordingly, the Participant shall have the
right to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
10
<PAGE>
6. Outstanding share right awards shall automatically terminate,
and no shares of Common Stock shall actually be issued in satisfaction of those
awards, if the performance goals or Service requirements established for such
awards are not attained. The Plan Administrator, however, shall have the
authority to issue shares of Common Stock in satisfaction of one or more
outstanding share right awards as to which the designated performance goals or
Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any Change in
Control or Hostile Take-Over in which those repurchase rights are assigned to
the successor corporation (or parent thereof) or otherwise continue in full
force and effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified below:
-----------
1. Each individual who is serving as a non-employee Board member
on the Underwriting Date shall automatically be granted at that time a Non-
Statutory Option to purchase Twenty Thousand (20,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
2. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase Twenty Thousand (20,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.
11
<PAGE>
3. On the date of each Annual Stockholders Meeting, beginning
with the first Annual Meeting held after the Underwriting Date, each individual
who is to continue to serve as a non-employee Board member, whether or not that
individual is standing for re-election to the Board, shall automatically be
granted a Non-Statutory Option to purchase Five Thousand (5,000) shares of
Common Stock, provided such individual has served as a non-employee Board member
for at least six (6) months.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each Twenty Thousand (20,000)-share
option shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments upon the Optionee's
completion of each year of Board service over the four (4)-year period measured
from the grant date. Each annual Five Thousand (5,000)-share option shall vest,
and the Corporation's repurchase right shall lapse, upon the Optionee's
completion of one (1) year of Board service measured from the grant date.
E. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this
----------------------------------
Article Four may, in connection with the Optionee's estate plan, be assigned in
whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust in which the Optionee and/or one or
more such family members have more than a fifty percent (50%) of the beneficial
interest or to any other entity in which the Optionee and/or one or more such
family members own more than fifty percent (50%) of the voting interests. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate. The Optionee may also designate a Beneficiary or Beneficiaries of
his or her outstanding options under this Article Four, and those options shall,
in accordance with such designation, be automatically transferred to such
Beneficiary or Beneficiaries upon Optionee's death while holding those options.
Such Beneficiary or Beneficiaries shall take the transferred options subject to
the all the terms and conditions of the applicable agreement evidencing each
such transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
12
<PAGE>
F. CESSATION OF BOARD SERVICE. The following provisions
--------------------------
shall govern the exercise of any options outstanding at the time of the
Optionee's cessation of Board service:
(i) Any option outstanding at the time of the
Optionee's cessation of Board service for any reason shall remain
exercisable for a twelve (12)-month period following the date of such
cessation of Board service, but in no event shall such option be
exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of
death may be subsequently exercised by his or her Beneficiary to the extent
that option is exercisable for one or more vested shares at the time of
Optionee's death.
(iii) Following the Optionee's cessation of Board
service, the option may not be exercised in the aggregate for more than the
number of shares in which the Optionee was vested on the date of such
cessation of Board service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the option
shall terminate and cease to be outstanding for any vested shares for which
the option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Board service, terminate and cease to be
outstanding for any and all shares in which the Optionee is not otherwise
at that time vested.
(iv) However, should the Optionee cease to serve as
a Board member by reason of death or Permanent Disability, then all shares
at the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of those
shares as fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control the Hostile
Take-Over, be exercised for all or any portion of those shares as fully-vested
shares of Common Stock. Each such option accelerated in connection with a Change
in Control shall terminate upon the Change in Control, except to the extent
assumed by the successor corporation (or parent thereof) or otherwise continued
in full force and effect pursuant to the terms of the Change in Control. Each
such option accelerated in connection with a Hostile Take-Over shall remain
exercisable until the expiration or sooner termination of the option term.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control or Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding
13
<PAGE>
options. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Option Surrender
Value of the shares of Common Stock at the time subject to each surrendered
option (whether or not the Optionee is otherwise at the time vested in those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
ARTICLE FIVE
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
14
<PAGE>
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Withholding Taxes to which such holders may become subject in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant or
Automatic Option Grant Program at any time on or after the Plan Effective Date.
However, no options granted under the Plan may be exercised, and no shares shall
be issued under the Plan, until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the Plan Effective Date, then all options previously granted under
this Plan shall terminate and cease to be outstanding, and no further options
shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further options or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12 Registration Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) April 20,
--------
2009 (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
15
<PAGE>
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
16
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
------------------------------
grant program in effect under the Plan.
B. BENEFICIARY shall mean, in the event the Plan Administrator
-----------
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
descent and distribution.
C. BOARD shall mean the Corporation's Board of Directors.
-----
D. CHANGE IN CONTROL shall mean a change in ownership or control of
-----------------
the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than fifty
------
percent (50%) of the total combined voting power of the voting securities
of the successor corporation are immediately thereafter beneficially owned,
directly or indirectly and in substantially the same proportion, by the
persons who beneficially owned the Corporation's outstanding voting
securities immediately prior to such transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board recommends such
stockholders to accept.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
F. COMMON STOCK shall mean the Corporation's common stock.
------------
G. CORPORATION shall mean Divicore Inc., a Delaware corporation, and
-----------
its successors.
A-1.
<PAGE>
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.
I. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. EXERCISE DATE shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any options made on the Underwriting Date,
the Fair Market Value shall be deemed to be equal to the price per share at
which the Common Stock is to be sold in the initial public offering
pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the Underwriting
Date, the Fair Market Value shall be determined by the Plan Administrator,
after taking into account such factors as it deems appropriate.
L. HOSTILE TAKE-OVER shall mean:
-----------------
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a
A-2.
<PAGE>
tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
M. INCENTIVE OPTION shall mean an option which satisfies the
----------------
requirements of Code Section 422.
N. INVOLUNTARY TERMINATION shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation or Parent or Subsidiary
employing the individual which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B)
a reduction in his or her level of compensation (including base salary,
fringe benefits and target bonus under any performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a relocation
of such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.
O. MISCONDUCT shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. This shall not limit the grounds for the dismissal or discharge of any
person in the Service of the Corporation (or any Parent or Subsidiary).
P. 1934 ACT shall mean the Securities Exchange Act of 1934, as
--------
amended.
Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
R. OPTION SURRENDER VALUE shall mean the Fair Market Value per share
----------------------
of Common Stock on the date the option is surrendered to the Corporation or, in
the event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of
A-3.
<PAGE>
Common Stock paid by the tender offeror in effecting such Hostile Take-Over, if
greater. However, if the surrendered option is an Incentive Option, the Option
Surrender Value shall not exceed the Fair Market Value per share.
S. OPTIONEE shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant or Automatic Option Grant Program.
T. PARENT shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
U. PARTICIPANT shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
Program, Permanent Disability or Permanently Disabled shall mean the inability
of the non-employee Board member to perform his or her usual duties as a Board
member by reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve (12)
months or more.
W. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction. However, the Primary Committee shall have
the plenary authority to make all factual determinations and to construe and
interpret any and all ambiguities under the Plan to the extent such authority is
not otherwise expressly delegated to any other Plan Administrator.
Y. PLAN EFFECTIVE DATE shall mean April 21, 1999, the date on which
-------------------
the Plan was adopted by the Board.
Z. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1995
-----------------
Stock Option Plan, as in effect immediately prior to the Plan Effective Date
hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
A-4.
<PAGE>
BB. SECONDARY COMMITTEE shall mean a committee of one (1) or more
-------------------
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
CC. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
DD. SERVICE shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
EE. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
FF. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
----------------------
effect under the Plan.
GG. SUBSIDIARY shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
HH. 10% STOCKHOLDER shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
II. UNDERWRITING DATE shall mean the date on which the underwriting
-----------------
agreement for the initial public offering of the Common Stock is executed and
priced.
JJ. WITHHOLDING TAXES shall mean the Federal, state and local income
-----
and employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection with
the exercise of those options or the vesting of those shares.
A-5.
<PAGE>
EXHIBIT 10.2
DIVICORE INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This 1999 Employee Stock Purchase Plan is intended to promote the
interests of Divicore Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed Five Hundred
Thousand (500,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable by all Participants in the aggregate on any one Purchase
Date and (iv) the number and class of securities and the price per share in
effect under each outstanding purchase right in order to prevent the dilution or
enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering
<PAGE>
period. However, the initial offering period shall commence at the Effective
Time and terminate on the last business day in July 2001. Subsequent offering
periods shall commence as designated by the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February to the last business day in July each year and from
the first business day in August] each year to the last business day in January
in the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in January 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
E. Notwithstanding anything to the contrary herein, should the total
number of shares of Common Stock to be purchased on any particular date exceed
the number of shares then available for issuance under the Plan, then the Plan
Administrator shall have the right to terminate the offering period during which
such purchase occurs and to determine when a new offering period shall commence.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
2
<PAGE>
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of any
new Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock
3
<PAGE>
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Three Hundred (1,300) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum aggregate number of shares of Common Stock purchasable
by all Participants on any one Purchase Date shall not exceed One Hundred
Twenty-Five Thousand (125,000) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. However, the Plan
Administrator shall have the discretionary authority, exercisable prior to the
start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per participant
and in the aggregate by all Participants on each Purchase Date within that
offering period.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further
4
<PAGE>
payroll deductions shall be collected from the Participant with respect to
the terminated purchase right. Any payroll deductions collected during the
Purchase Interval in which such termination occurs shall, at the
Participant's election, be immediately refunded or held for the purchase of
shares on the next Purchase Date. If no such election is made at the
timesuch purchase right is terminated, then the payroll deductions
collected with respect to the terminated right shall be refunded as soon as
possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or change in
status) while his or her purchase right remains outstanding, then that
purchase right shall immediately terminate, and all of the Participant's
payroll deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (i) within ninety (90) days
following the commencement of such leave or, (ii) prior to the expiration
of any longer period for which such Participant's right to reemployment
with the Corporation is guaranteed by either statute or contract, his or
her payroll deductions under the Plan shall automatically resume at the
rate in effect at the time the leave began. However, should the
Participant's leave of absence exceed ninety (90) days and his or her re-
employment rights not be guaranteed by either statute or contract, then the
Participant's status as an Eligible Employee will be deemed to terminate on
the ninety-first (91st) day of that leave, and such Participant's purchase
right for the offering period in which that leave began shall thereupon
terminate. An individual who returns to active employment following such a
leave shall be treated as a new Employee for purposes of the Plan and must,
in order to resume participation in the Plan, re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or before his
or her scheduled Entry Date into the offering period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase
of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share
-----
of Common Stock on the Participant's Entry Date into the offering period in
which such Change in Control occurs or (ii) the Fair Market Value per share
of Common Stock immediately prior to the effective date
5
<PAGE>
of such Change in Control. However, the applicable limitations on the
number of shares of Common Stock purchasable per Participant shall continue
to apply to any such purchase, but not the limitation applicable to the
maximum number of shares of Common Stock purchasable in the aggregate.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice,
have the right to terminate their outstanding purchase rights prior to the
effective date of the Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
----------------------------
shares of Common Stock to be purchased pursuant to outstanding purchase
rights on any particular date exceed the number of shares then available
for issuance under the Plan, the Plan Administrator shall make a pro-rata
allocation of the available shares on a uniform and nondiscriminatory
basis, and the payroll deductions of each Participant, to the extent in
excess of the aggregate purchase price payable for the Common Stock pro-
rated to such individual, shall be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only
-------------
by the Participant and shall not be assignable or transferable by the
Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding
purchase right until the shares are purchased on the Participant's behalf
in accordance with the provisions of the Plan and the Participant has
become a holder of record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on each
successive Purchase Date during the offering period on which such right
remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant has
already accrued in the same calendar year the right to acquire Common Stock
under one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common
6
<PAGE>
Stock (determined on the basis of the Fair Market Value per share on the
date or dates of grant) for each calendar year such rights were at any time
outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board in April 1999 and shall become
effective at the Effective Time, provided no purchase rights granted under the
--------
Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2009, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the
7
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number of shares of Common Stock issuable under the Plan, except for permissible
adjustments in the event of certain changes in the Corporation's capitalization,
(ii) alter the purchase price formula so as to reduce the purchase price payable
for the shares of Common Stock purchasable under the Plan or (iii) modify the
eligibility requirements for participation in the Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
8
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
Divicore Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CASH EARNINGS shall mean the (i) base salary payable to a
-------------
Participant by one or more Participating Corporations during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall NOT include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CHANGE IN CONTROL shall mean a change in ownership or control of
-----------------
the Corporation pursuant to any of the following transactions::
(i) a stockholder-approved merger or consolidation in which
securities possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are transferred to
a person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) a stockholder-approved sale, transfer or other disposition of
all or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
A-1
<PAGE>
G. CORPORATION shall mean Divicore Inc., a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of Divicore Inc. which shall by appropriate action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
--------
M. 1934 ACT shall mean the Securities Exchange Act of 1934, as
--------
amended.
A-2
<PAGE>
N. PARTICIPANT shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
O. PARTICIPATING CORPORATION shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
P. PLAN shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
Q. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
R. PURCHASE DATE shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 31, 2000.
S. PURCHASE INTERVAL shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
T. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
U. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
V. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.
W. UNDERWRITING DATE shall mean the date the Underwriting Agreement
-----------------
is executed and the Common Stock priced for the initial public offering.
A-3
<PAGE>
EXHIBIT 10.3
DIVICORE INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into this ____ day of ______, between Divicore Inc., a Delaware corporation (the
"Company"), and ___________________ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an officer,
employee or agent of the Company, performs a valuable service in such capacity
for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the Code,
the Company either has purchased and presently maintains or intends to purchase
and maintain a policy or policies of Directors and Officers Liability Insurance
("D & O Insurance") covering certain liabilities which may be incurred by its
directors and officers in the performance of their duties as directors and
officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director, officer, employee or agent after the date hereof, and for other good
and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
-----------------------------
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
<PAGE>
2. Additional Indemnity. Subject only to the exclusions set forth in
--------------------
Sections 3 and 6(c) hereof, the Company hereby further agrees to hold harmless
and indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Company under the non-exclusivity provisions of Article VII,
Section 6 of the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
-----------------------------------
(a) No indemnity pursuant to Section 2 hereof shall be paid by
the Company:
i) in respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
iii) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest or to
constitute willful misconduct;
iv) on account of Indemnitee's conduct which is the subject
of an action, suit or proceeding described in Section 6(c)(ii) hereof;
v) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 7(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors;
vi) if a final decision by a Court having jurisdiction in
the matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Indemnitee have been advised that the Securities
and Exchange Commission
2
<PAGE>
believes that indemnification for liabilities arising under the federal
securities laws is against public policy and is, therefore, unenforceable and
that claims for indemnification should be submitted to appropriate courts for
adjudication); and
vii) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of (a) such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional
amount paid to the Indemnitee pursuant to any D & O Insurance purchased and
maintained by the Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be
paid by the Company if the action, suit or proceeding with respect to which a
claim for indemnity hereunder is made arose from or is based upon any of the
following:
i) Any solicitation of proxies by Indemnitee, or by a
group of which he was or became a member consisting of two or more persons that
had agreed (whether formally or informally and whether or not in writing) to act
together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a
breach of or default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections
------------
1 and 2 hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Company agrees that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty
---------------------------------
(30) days after receipt by Indemnitee of notice of the commencement of any
action, suit or proceeding, Indemnitee shall, if a claim in respect thereof is
to be made against the Company under this Agreement, notify the Company of the
commencement thereof; but Indemnitee's omission so to notify the Company will
not relieve the Company from any liability which it may have to
3
<PAGE>
Indemnitee otherwise than under this Agreement. With respect to any such action,
suit or proceeding as to which Indemnitee notifies the Company of the
commencement thereof:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, to the extent that it may
wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
6. Advancement and Repayment of Expenses.
-------------------------------------
(a) In the event that Indemnitee employs his or her own counsel
pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving from Indemnitee copies of invoices presented to Indemnitee
for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the Company
for all reasonable expenses paid by the Company in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
4
<PAGE>
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Indemnitee in respect of any action arising
from or based upon any of the matters set forth in subsection (b) of Section 3
or if Indemnitee (i) commences any action, suit or proceeding as a plaintiff
unless such advance is specifically approved by a majority of the Board of
Directors or (ii) is a party to an action, suit or proceeding brought by the
Company and approved by a majority of the Board which alleges willful
misappropriation of corporate assets by Indemnitee, disclosure of confidential
information in violation of Indemnitee's fiduciary or contractual obligations to
the Company, or any other willful and deliberate breach in bad faith of
Indemnitee's duty to the Company or its shareholders.
7. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on the Company hereby in
order to induce Indemnitee to continue as a director, officer, employee or other
agent of the Company, and acknowledges that Indemnitee is relying upon this
Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Company shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses, including attorney's fees, in bringing and
pursuing such action.
8. Subrogation. In the event of payment under this agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of
---------------------------
the Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
------------------
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
-------------------------
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
5
<PAGE>
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
------------
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
13. Governing Law. This Agreement shall be interpreted and enforced
-------------
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
--------------
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
DIVICORE INC.
a Delaware corporation
By:______________________________
INDEMNITEE
_________________________________
Address: ________________________
_________________________________
6
<PAGE>
EXHIBIT 10.4
October 28, 1997
Frank Wilde
President
Quadrant International
269 Great Valley Parkway
Malvern, PA 19355
Dear Frank:
We welcome Quadrant International as a Dell supplier and look forward to a
mutually beneficial working relationship. The Products you will supply to Dell
and related information are stated on the attachment to this letter. This
letter and the Product Labeling, Packaging and Quality Specifications supplement
the terms and conditions of the standard Dell Purchase Order ("Dell PO"). In
the event of a conflict with this or any attachment, the terms of this letter
control. The Dell PO and this letter set forth the only terms by which we will
do business. In the event we need to modify these terms in the future, we can
do so in a letter signed by each of us.
Unless one of its informs the other of its intent to terminate this agreement
sooner, the term of our agreement shall be one year, beginning on the date of
this letter. This agreement will automatically renew for one-year terms unless
one party informs the other of its intent to terminate the agreement thirty days
(unless otherwise indicated "days" shall mean calendar days) before the end of
the current term. Either party may terminate this agreement based on the
material breach of the other party, provided that the party alleged to be in
material breach receives thirty days written notice stating the cause and an
additional thirty days to cure. Either party may terminate this agreement
without cause with ninety days prior written notice to the other party.
Meeting scheduled delivery dates is a material term of this agreement. Quadrant
International agrees to fill all Dell POs and will use reasonable efforts to
reduce the lead time during the term of this agreement. Quadrant International
agrees to maintain a buffer stock of Product Inventory in an amount equal to
Dell's forecasted two week use requirements ("Revolver Inventory") in close
proximity to Dell's manufacturing locations: AMF - Austin, Texas; EMF -
Limerick, Ireland; APCC - Penang, Malaysia.
Quadrant International agrees to meet all scheduled delivery dates including all
acceleration targets set forth in this agreement, its attachment and related
purchase order(s). Any failure by Quadrant International to meet these dates or
targets will greatly impact Dell's ability to manufacture, support, distribute,
license and sell its systems. Therefore, Quadrant International agrees to place
the following, materials into escrow: (1) detailed Costed BOM with Approved
Supplier List, (2) all Software, in both source code and object code forms, (3)
all Documentation and (4) any other materials necessary to enable Dell to
manufacture, support, distribute, license and sell the Products, Software and
Documentation ("Escrow Materials"). Quadrant International also agrees to
provide on-site expert engineering at Dell to assistance in manufacturing,
design and validation. Quadrant International shall update the Escrow Materials
within five days after any modification is made by Quadrant International to the
Escrow Materials. The escrow agent will be mutually agreed upon and Dell shall
be responsible for paying the escrow agent's fees.
The Escrow Materials shall be released to Dell by the escrow agent under the
following circumstances: (1) Quadrant International is in breach of this
agreement and Dell has notified Quadrant International in writing and provided a
five day period to cure the breach, (2) Dell requests assurances that Quadrant
International will be able to meet its delivery dates and acceleration targets
and such assurances are not acceptable to Dell or (3) any adjudication of
bankruptcy or judgment of insolvency is filed by or against Quadrant
International or there is an assignment for the benefit of any creditor.
Dell agrees not to exercise the following rights until the Escrow Materials are
released to Dell by the escrow agent. Quadrant International hereby grants to
Dell an irrevocable, worldwide, royalty free, fully paid up, non-exclusive right
and license under any copyrights, patents, patent applications, trade secrets
and other necessary intellectual property rights to: (1) use, make, reproduce,
display, perform and prepare derivative works of the Escrow Materials
<PAGE>
for the purposes of enabling Dell to manufacture, support distribute, license
and sell the Products, Software and Documentation in connection with Dell
systems and (2) authorize and license, with Quadrant International's written
permission, Dell's agents to do any of the foregoing on Dell's behalf. The terms
and conditions of this agreement, its attachment and related purchase order(s)
including, without limitation, all warranty and indemnification provisions,
shall apply to all Products, Software and Documentation manufactured by Dell or
its agents as if they were manufactured by Quadrant International.
Quadrant International warrants the Products for a period of five (5) years from
date of delivery. Further, Product quality must be maintained and consistently
improved by Quadrant International. Accordingly, Quadrant International will
manufacture and assemble the Products only in the location(s) set forth on the
attachment, and must provide Dell ninety days written notice of a change in
manufacturing and/or assembly location.
Quadrant International grants to Dell, under all necessary intellectual property
rights, including, without limitation, copyrights, patents and trademarks, the
rights and license to distribute and market the Product(s), which include, or
are based upon, DVD technology. Quadrant International represents and warrants
to Dell that it has the right to grant the above right and license and that any
royalties paid for DVD technology licenses are passed through to Dell in the
Product price without any added amount.
To establish acceptable product quality, Quadrant International agrees to
include Dell Product and test requirements in its initial test project reviews.
In order to improve Product quality, Quadrant International agrees to conduct
weekly meetings, generally by phone, to address quality issues. Quadrant
International will submit to annual design, facility, process, and quality
audits during the term of this agreement, and at any additional time Dell
determines that product quality is unacceptable. Dell will provide three
business days notice when reasonable of its intent to conduct an audit. Upon
Dell's request, Quadrant International will provide to Dell or its authorized
representatives: (i) information requested by Dell related to product quality,
and (ii) reasonable access to its facilities and employees during normal
business hours for the purpose of conducting an audit. Audits will be conducted
under a non-disclosure agreement between the parties.
After audit results have been prepared, Quadrant International agrees to
establish a failure review and corrective action team to manage corrective and
preventative actions arising from the audit report. Quadrant International will
assign a failure analysis engineer to work with Dell to address quality issues
and to oversee Product testing in accordance with a customized Dell test plan.
Quadrant International will issue RMA numbers within twenty four hours of Dell's
request and agrees to segregate and separately report line and field returns by
region. Quadrant International also agrees to provide failure analysis to
component level within ten days of receipt of returned Products and will, at
Dell's option, provide a credit for the purchase price, or return replacement
Product(s). to Dell no later than fifteen days after receipt of returned
Products. Replacement Products shall be fully warranted upon re-receipt at
incoming inspection. Additionally, Quadrant International warrants that the
Products shall be able to accurately process date data (including, but not
limited to, calculating, comparing, and sequencing) between the twentieth and
twenty-first centuries and that the Products are certified by Microsoft as PC 9x
compliant or Quadrant International can demonstrate in writing that Microsoft
has exempted the Products from PC 9x compliance.
Quadrant International agrees to provide Dell with a concise printed end user
Product guide containing instructions for operation of the Product and a Product
registration card without any advertising content ("Documentation"). Dell may
distribute Documentation and/or post Documentation, in electronic form, on
bulletin boards. Quadrant International agrees to provide national language
versions of Documentation to Dell including, but not limited to English, French,
German and Japanese. Dell may add the following languages to the list of
required national language versions with written notice to Quadrant
International: Spanish, Simplified and Traditional Chinese.
For all device drivers, firmware, and all necessary software for the proper
operation and support of the Product (collectively "Software"), Dell is granted
a non-exclusive, irrevocable, royalty free, worldwide, right and license, to
use, reproduce and distribute Software in connection with Dell's distribution
and support of the Product. Quadrant International agrees to provide all
updates and modifications to the Software to Dell during the term of our
agreement. The obligations related to the Product contained in the Dell PO
apply equally to Software.
2
<PAGE>
Quadrant International warrants that any returned Product is new and unused and
has not been refurbished. If Dell requests refurbished Product, such Product
will he provided to Dell clearly marked as such. QUADRANT INTERNATIONAL shall
indemnify and hold harmless Dell from any claims, liabilities or damages,
including reasonable attorneys fees, arising out of or relating to Quadrant
International Graphic's provision of refurbished Product that is not clearly and
conspicuously labeled as such.
The cost and rates for repairs shall be set forth in the attachment. End of
life and retention of spares are addressed in the attachment as well.
Since Dell transacts business with the United States government, Quadrant
International must comply with applicable laws and Federal Acquisition
Regulations ("FARs") including the following:
It is Dell's policy to take affirmative action to provide equal employment
opportunity without regard to race, religion, color, national origin, age,
sex, disability, veterans status or any other legally protected status. As
a condition of doing business, Dell requires you to practice equal
opportunity employment and to comply with Executive Order 11246, as
amended, Section 503 of the Rehabilitation Act of 1973, and Section 4212 of
the Vietnam Era Veteran's Readjustment Assistance Act of 1974, all as
amended, and the relevant Regulations and Orders of the U.S. Secretary of
Labor. Additionally, to the extent required by applicable law, the
following sections of Chapter 60 of Title 41 of the Code of Federal
Regulations are incorporated by reference in this Agreement and each Order:
41 CFR 60-1.4(a); 41 CFR 60-1.8, 41 CFR 60-741; 41 CFR 60-250; 41 CFR 60-
1.7; 41 CFR 60-1.40.
It is the policy of the United States (FAR 52.219-8) that small business
concerns, small business concerns owned and controlled by socially and
economically disadvantaged individuals, and small business concerns owned
and controlled by women shall have the maximum practicable opportunity to
participate in performing contracts for any Federal agency. Quadrant
International agrees to comply with this policy and to provide reporting of
data as requested to the Small Business Liaison Officer, Dell Computer
Corporation, One Dell Way, Round Rock, Texas, 78682.
Before either party initiates a lawsuit against the other relating to this
agreement, the parties agree to work in good faith to resolve between them all
disputes and claims arising out of or relating to this agreement, the parties'
performance under it, or its breach. To this end, either party may request,
after informal discussions have failed to resolve a dispute or claim, that each
party designate an officer or other management employee with authority to bind
the party to meet in good faith and attempt to resolve the dispute or claim.
During their discussions, each party will honor the other's reasonable requests
for information relating to the dispute or claim.
Please sign and date both original copies of this letter, retain a fully signed
original for your records and return a fully signed original to Dell in the
envelope we have provided.
Sincerely,
/s/ Lily s. Cheung 1/6/98
- ----------------------- ------
Dell Products, L.P. Date
/s/ Francis E. Wilde 11/11/97
- ----------------------- --------
Quadrant International Date
3
<PAGE>
EXHIBIT 10.5
FINAL DRAFT
LICENSE AGREEMENT
-----------------
Parties: Quadrant International, Inc.
- -------
a Pennsylvania corporation ("QI")
269 Great Valley Parkway,
Malvern, PA 19355 U.S.A.
STMicroelectronics, Inc.
a Delaware Corporation ("ST")
1310 Electronics Drive
Carrollton, Texas 75006
EFFECTIVE DATE: June 30, 1998
- --------------
RECITALS
--------
a. ST is in the business of, among other things, developing
integrated circuits and more specifically graphics and multimedia controller
integrated circuits.
b. QI is the owner of a software DVD product currently marketed by
QI under the brand name Cinemaster.
C. ST wishes to license rights to certain of QI's software DVD
products and QI desires to grant such rights to ST.
NOW, THEREFORE, in consideration of the above, and the mutual
promises set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency is hereby acknowledged by the
parties, the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
For the purpose of this Agreement, the following words and phrases
shall have the following meanings:
1.1 "AC-3 Licensee" means any Person licensed by Dolby to
-------------
manufacture products containing digital audio coding technology known as Dolby
AC-3.
1.2 "Affiliate" means an entity controlling, controlled by, or
---------
under common control with ST. Control exists when an entity owns or controls
more than 50% of the outstanding shares or securities representing the right to
vote for the election of directors or other managing authority or another
entity.
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
1.3 "CSS" means Contents Scramble System developed by MEI and
---
Toshiba to provide protection for the contents of digital versatile discs (DVD
discs) as described in CSS Specifications.
1.4 "CSS Compliant" means a DVD product which complies with CSS
-------------
Specifications.
1.5 "CSS Licensee" means anyone that enters into a CSS License
------------
agreement with either MEI or with the organization that administers CSS, which
is currently being established by MEI, Toshiba and other DVD industry members.
1.6 "CSS Specification" means the documentation relating to CSS
-----------------
entitled "CSS Specifications", including "Procedural Specifications" and
"Technical Specifications," that MEI makes available to CSS Licensees.
1.7 "Deliverables and Payment Schedule" means the deliverables and
---------------------------------
payment schedule set forth on Schedule 1.7, and as may be revised from time to
time by mutual written agreement of the parties.
1.8 "Derivative" means (a) for copyrightable or copyrighted material
----------
(including materials subject to mask work rights), a work which is based upon
one or more preexisting works (or portions of preexisting works), such as a
revision, modification, translation, abridgment, condensation, expansion,
collection, compilation, or any other form in which such preexisting works may
be may be recast, transformed, or adapted; (b) for patentable or patented
materials, any adaptation, addition, improvement, or combination based on a
preexisting work; and (c) for material subject to trade secret protection, any
new material, information, or data relating to and derived from such existing
trade secret material, including new material which may be subject to protection
under copyright law, patent law, trade secret law, or other intellectual
property laws.
1.9 "Documentation" means user manuals and other written materials
-------------
that relate to QI's Software DVD, and may include materials useful for design
(for example, logic manuals, flow charts, and principles of operation), and
machine-readable text or graphic files subject to display or printout which
comply with CSS, Dolby and Macrovision license requirements.
1.10 "Dolby" means Dolby Laboratories Licensing Corporation
-----
("Dolby"), a New York corporation, 100 Potrero Avenue, San Francisco, California
94103.
1.11 "Dolby Certified" means the design approval and performance
---------------
testing by Dolby of an AC-3 product to be manufactured by an AC-3 Licensee.
1.12 "Dolby Royalties" means royalties payable to Dolby pursuant to
---------------
an AC-3 license by an AC-3 Licensee.
1.13 "Intellectual Property Rights" means (a) all Patent Rights; (b)
----------------------------
all trade secret rights arising under the laws of any jurisdiction; (c) all
United States and foreign semiconductor mask work rights and registrations for
such rights; and (d) all copyright rights and
2
<PAGE>
all other literary property and author rights, whether or not copyrightable, and
all copyrights and copyrighted interests, including any renewals thereof, but
will not include any rights in any trademarks, trade names, service marks,
logos, trade dress and/or the goodwill associated therewith. "Patent Rights"
means all United States and foreign letters patent and applications for letters
patent, industrial models, industrial designs, utility models, certificates of
invention, and other indicia of invention ownership, including any such rights
granted upon any reissue, division, continuation or continuation-in-part
applications now or hereafter filed.
1.14 "Level 1 Support" means support for STs Customers relating to
---------------
program usage, program and hardware compatibility and program requirements.
1.15 "Level 2 Support" means technical support which is back-up for
---------------
Level 1 Support and isolates problems and defects relating to program and
hardware compatibility and program requirements.
1.16 "Level 3 Support" means development and manufacturing support to
---------------
fix program defects.
1.17 "Licensed Product" means an ST Product incorporating either
----------------
Shippable DVD Software or any QI owned Intellectual Property Right (or
Derivative thereof).
1.18 "MEI" means Matsushita Electric Industrial, Co. Ltd., a Japanese
---
corporation, 1006 Kadoma, Osaka 571, Japan.
1.19 "Macrovision" mews Macrovision Corporation, a Delaware
-----------
corporation 1341 Orleans Drive, Sunnyvale, California 94089.
1.20 "Macrovision Certified" means the provision of a certificate by
---------------------
Macrovision evidencing testing and approval.
1.21 "Microsoft" means Microsoft Corporation, a Washington
---------
corporation, One Microsoft Way, Redmond, Washington 98052.
1.22 "Microsoft Certified" means the provision of a certificate by
-------------------
Microsoft evidencing WHQL (Windows Hardware Quality Labs) qualified and/or
approved.
1.23 "Net Sales" means the gross consideration for Licensed Products
---------
which ST or an Affiliate first sells, leases, or exchanges for consideration
(whether or not such sale, lease, or exchange is for cash or otherwise) to an ST
Customer during each calendar quarter in which royalties accrue, less any
charges shown in the invoice for such product for taxes, packing,
transportation, and insurance, and any discounts or rebates granted in respect
of any such product and shown in the invoice, and any returns of product.
1.24 "Object Code" means the machine readable form computer
-----------
programming code as opposed to the human readable form of computer programming
code.
3
<PAGE>
1.25 "Person" means any individual, sole proprietorship, joint
------
venture, partnership, corporation, association, trust estate, governmental
agency, regulatory agency, regulatory authority, or any other entity.
1.26 "Project Manager" means the primary contact person designated by
---------------
each party in writing, who will coordinate the activities of the parties
hereunder. Each party may change its designated Project Manager from time to
time during the term of this Agreement by written notice.
1.27 "Proprietary Items" means all of the following, whether provided
-----------------
to ST orally, in written form or otherwise: (a) all software (in Source or
Object Code form), (b) any information, technical data, trade secrets, or know-
how, including, but not limited to, that which relates to QI's research, product
plans, products, services, customers, markets, software, hardware, developments,
inventions, discoveries, procedures, methods, experimental techniques,
processes, designs, drawings, blueprints, specifications, patent applications,
engineering, hardware and software configuration information, processes,
methods, materials, sources of supply and fees; (c) all information relating to
QI's past, present and future marketing and business activities; (d) all
information regarding QI's prior, current and prospective customers and
suppliers, including but not limited to, each customer's or supplier's name,
address and other identifying information, all information regarding the
products or services sold to or purchased from each such customer or supplier,
and all information regarding the business relationship and business
transactions between QI and each such customer and supplier, and (e) all
information that is provided by or on behalf of QI to ST which is specified as
being confidential. Proprietary Items expressly includes any and all
information derived from the foregoing Proprietary Items and all compilations
and copies thereof. Notwithstanding the foregoing, Proprietary Items will not
include any information (i) which was known to ST prior to its disclosure by QI
(as evidenced by contemporaneous written records maintained in the ordinary
course of business) and not the subject of any other confidentiality obligation
owed to QI, (ii) which is currently or subsequently becomes part of the public
domain through no fault of ST, (iii) which is disclosed to ST by any Person who
is not bound by an obligation to maintain such information in confidence, or
(iv) which was independently developed or created by ST without reference to any
Proprietary Items (as evidenced by contemporaneous written records maintained in
the ordinary course of business).
1.28 "QI Software DVD" means (i) software developed by QI and
---------------
currently marketed under the brand name Cinemaster, as more fully described on
Schedule 1.7, and (ii) subsequent versions thereof incorporating improvements,
modifications, enhancements, or bug fixes that QI specifically makes available
to ST or that QI makes available to its other similarly situated licensees for
graphics accelerator products incorporating or utilizing "motion compensation"
technology during the term of this Agreement, and, (iii) tools, including
diagnostic tools and utilities used in such software build process, as more
fully described on Exhibit 1.7.
1.29 "Source Code" means the human readable form computer programming
-----------
code and related system level documentation, including all comments and any
procedural code such as job control languages.
4
<PAGE>
1.30 "Shippable Software DVD" means a version of the QI Software
----------------------
DVD which is CSS Compliant and has been Dolby Certified, Macrovision Certified,
Microsoft Certified and meets any further certification obligations, including
DVD, imposed as a requirement to provide DVD products and has met and passed all
of ST's internal quality assurance tests and qualifications.
1.31 "ST Customer" means any Person other than ST or an ST
-----------
Affiliate to which ST or an ST Affiliate sells a Licensed Product.
1.32 "ST Product" means ST's graphics and multimedia controller
----------
integrated circuit products.
1.33 "ST Trademarks" means ST's trademarks, service marks and
-------------
logos.
1.34 "Toshiba" means Toshiba Corporation, a Japan corporation, 1-
-------
1, Shibura 1-Chome, Minato-ku, Tokyo 105-01, Japan.
1.35 As used herein, the terms "sale," "sell," or "sold" (and
other conjugated forms of the verb "to sell") in the context of a copy of any
software product means the sale, or other disposition, of a license for a copy
of such software.
SECTION 2: DELIVERABLES AND QI SUPPORT
---------------------------
2.1 Deliverables. QI and ST will use commercially reasonable
------------
efforts to deliver those deliverables specified in the Deliverables and Payment
Schedule in accordance with such Schedule.
2.2 Level I Support and Level 2 Support. ST shall provide Level 1
-----------------------------------
Support at its own cost and expense. QI shall provide Level 2 support at QI's
own cost and expense.
2.3 Level 3 Support. QI shall provide, at no additional charge,
---------------
Level 3 Support directly to ST for Shippable Software DVD for the full term of
the Agreement. In the event of a critical bug or problem, QI will make best
efforts to fix the problem within two business days. In the event that QI is
unable to fix the problem within such two business days, QI will provide ST with
a written detailed plan, including a schedule and outlining the problem and
possible resolutions.
2.4 Updates. During the term of this Agreement, QI will provide
-------
to ST those Derivatives, in Object Code form, that QI makes to QI Software DVD
or Shippable Software DVD that are applicable to the Licensed Product and which
QI makes available to its other similarly situated licensees for QI Software DVD
or Shippable Software DVD for graphics accelerator products incorporating or
utilizing "motion compensation" technology.
2.5 Modifications Required by CSS License. During the term of
-------------------------------------
this Agreement, if either party's CSS License requires any modification or
enhancement to the Shippable Software DVD, then QI shall modify the Shippable
Software DVD currently being distributed by QI to ensure the software is CSS
Compliant within the time period required by both parties' CSS License and the
CSS Specifications.
5
<PAGE>
2.6 QI Staffing. During the term of this Agreement, QI shall
-----------
designate a sufficient number of its engineering staff members to meet the
schedules contained in the Deliverables and Payment Schedule.
2.7 Periodic Meetings. The Project Managers shall schedule formal
-----------------
meetings at mutually agreeable times during the term hereof, to be attended by
personnel of each party, to discuss the status of the parties' performance under
the Deliverables and Payment Schedule.
SECTION 3. OWNERSHIP
---------
Intellectual Property Rights arising, developed or delivered
hereunder shall be owned as follows: Intellectual Property Rights originated,
discovered or developed by QI, shall be owned by QI, and Intellectual Property
Rights originated, discovered or developed by ST shall be owned by ST.
Intellectual Property Rights originated, discovered or developed jointly by both
parties ("Jointly Owned Intellectual Property") shall be jointly owned and each
party shall have the unrestricted right under Jointly Owned Intellectual
Property to make, use, sub-license and/or sell any product anywhere in the
world, in Object Code form only, without any restriction by the other party.
Both parties agree to execute without further consideration any and all further
documents or assurances as may be necessary to effect the above or to assist one
party in protecting (including the filing of patents) the Jointly Owned
Intellectual Property. To the extent that any ST owned Intellectual Property
Rights or any Jointly Owned Intellectual Property Rights comprise or contain
Derivatives of QI owned Intellectual Property Rights, then ST may only use such
rights in connection with the manufacture and Sale of Licensed Products.
SECTION 4: LICENSE GRANTS
--------------
4.1 QI hereby grants ST a perpetual (except as provided in
Section 11.3), worldwide, non-exclusive right to use and reproduce the Shippable
Software DVD that QI delivers to ST hereunder, as the same may be modified by QI
or ST in accordance with this Agreement, and to incorporate such copies of such
Shippable Software DVD on Licensed Products; and to make, have made, use, offer
for sale, sell, and otherwise distribute the Shippable Software DVD as
incorporated on Licensed Products.
4.2 ST and ST's Affiliates may only ship Shippable Software DVD
in Object Code form, and only in such manner that ST would have the ability to
account for, and ST does in fact account for, the exact number of such copies of
the software sold or distributed with Licensed Products so that the appropriate
royalty payments may be made to QI hereunder.
4.3 ST shall have the right to extend the license granted in this
Section 4 to ST's Affiliates. Any such Affiliates shall be bound by the same
terms and conditions in this Agreement and ST shall remain responsible for the
payment of any and all royalties relating to such Affiliates.
4.4 Source Code.
-----------
(a) QI hereby grants to ST, for so long as ST is permitted
hereunder to sell Licensed Products, a non-exclusive, non-transferrable, non-
sublicensable right to use, reproduce, and modify those portions of the Source
Code for QI Software DVD that QI provides to ST in
6
<PAGE>
accordance with this Agreement, but solely for the limited purpose of
customizing, enhancing, or fixing bugs in the version(s) of the QI Software DVD
delivered to ST pursuant to Schedule 1.7, or any later delivered Derivative
thereof, and to compile such Source Code into Object Code form and to make, have
made, use, offer for sale, sell, and otherwise distribute such Object Code on
Licensed Products in accordance with this Agreement. Notwithstanding anything
else herein to the contrary: (a) ST shall not be permitted to use, reproduce or
modify the Source Code to create a new product or a product that is materially
different from QI Software DVD; and (b) the License granted under this Section
4.5. is only for customizations, enhancements or bug fixes to the graphical user
interface (i.e. the "GUI"), and/or other "high level" or "front-end" portions of
the QI Software DVD.
(b) In order for ST to have access to Source Code hereunder, ST
shall submit to QI a written request for the Source Code, which request shall
set forth in reasonable detail the specific customizations, enhancements and/or
bug fixes for which ST desires to have access to the Source Code. Unless QI
determines within its reasonable discretion that ST's proposed use for the
Source Code is outside the scope of this Agreement, QI will deliver to ST those
portions of the Source Code that are necessary for ST to make the
customizations, enhancements and/or bug fixes, provided, however, that ST and
-------- -------
those Persons who will have access to the Source Code, whether such Persons are
employees or independent contractors of ST, will have signed such non-
disclosure, non-competition and/or other agreements as QI deems reasonably
appropriate. The terms and conditions of this Section 4.6 are in addition to the
terms and conditions of Section 7 of this Agreement.
(c) The parties acknowledge and agree that portions of the Source
Code contain trade secrets and proprietary information of third parties, and
that QI is contractually bound not to disclose such portions of the Source Code
to others, including ST. Accordingly, notwithstanding any other provision of
this Agreement to the contrary, QI will not deliver to ST such portions of the
Source Code that contain or comprise trade secrets or proprietary information of
any third parties.
(d) Notwithstanding any other provision of this Agreement to the
contrary, QI shall have no obligation to support, modify or bug fix the QI
Software DVD of ST, if ST, by itself or through others, has modified the Source
Code for the QI Software DVD.
SECTION 5: FINANCIAL TERMS
---------------
5.1 Deliverables and Payment Schedule. ST shall make payments to
---------------------------------
QI in accordance with the Deliverables and Payment Schedule. Such payments shall
be nonrefundable. In addition to the payment to be made under the Deliverables
and Payment Schedule, ST will pay QI in accordance with the other provisions of
this Section 5. Upon execution of this Agreement, QI may immediately invoice ST
for the * NRE set forth on the Deliverables and Payment Schedule.
5.2 Royalty Payments by ST. During the term of this Agreement
----------------------
and at all times thereafter, ST shall pay QI royalties based on the sales within
forty-five (45) days after the end of each calendar quarter (ending on March 31,
June 30, September 30 and December 31), for sale of Licensed products during
such quarter. All royalties due QI hereunder shall accrue when
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
7
<PAGE>
Licensed Products are sold, shipped, billed and/or paid for, whichever occurs
first. The royalty rate shall be as follows:
Cumulative Volume Royalty Per Copy
----------------- ----------------
* *
ST will be responsible for Dolby royalties or any other royalties arising out of
the DVD or CSS forum payable on Shippable DVD Software sold by or on behalf of
ST and its Affiliates.
5.3 Records and Reports. ST shall maintain complete, clear and
-------------------
accurate records of Licensed Products that ST and/or the Affiliates sell or
distribute. In addition to the quarterly royalty payment described in Section
5.2, ST shall also provide QI with a written summary of the Net Sales during
such calendar quarter.
5.4 Taxes, Duties, Levies, VAT.
--------------------------
(a) ST shall pay all taxes, duties, levies, handling charges and
other fees (other than QI's direct net income taxes) imposed or levied against
or incurred by either ST or QI under any law now or hereafter in effect, levied
or based upon the license, delivery, shipment, import, export, manufacture or
ST's possession or use of the software licensed hereunder or upon the grant of
the licenses contemplated by this Agreement or the exercise thereof or based
upon or measured by the royalty or payment thereof or any part thereof. It is
understood and agreed that if ST is required by any governmental authority to
withhold any portion of the royalty prescribed herein and pay over such portion
to such governmental authority, then such monies retained by ST and paid over to
the governmental authority shall be deemed to be a payment by ST to QI in
satisfaction and to the extent, of that portion of ST's obligation under this
Agreement, provided, however, that ST promptly furnish QI with official
government receipts as evidence of each such payment.
(b) If any governmental authority requires that value added tax
("VAT") is to be levied on payments hereunder, ST will be solely responsible for
payment of said VAT levies.
5.5 Audit. QI shall have the right during the term of this
-----
Agreement and for so long as ST is obligated to make royalty payments to QI
hereunder (but in any event at least for two (2) years after termination of this
Agreement), to have an inspection and audit of the records maintained by QI
conducted by a mutually agreeable third party auditor employed by a so-called
Big Six Accounting firm, which inspection and audit shall be conducted during
regular business hours at the other party's offices, upon thirty (30) days
notice. This audit right shall be limited to once per year. QI will be
responsible for the fees and costs of each such audit, unless an audit reveals
an underpayment of fees and/or royalties of more than ten percent (10%), in
which event
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
8
<PAGE>
ST will promptly pay QI the amount of any such underpayment, together with
interest in accordance with Section 5.6, and the costs of such audit.
5.6 Interest. Any payment which is delayed for more than thirty
--------
(30) days beyond the due date shall be subject to an interest and service charge
of one percent (1%) per month, compounded monthly from the date such payment
first became due until paid.
5.7 Payment Method. All payments made hereunder shall be made in
--------------
United States currency, by wire transfer, check, or other reasonable payment
means and to such United States bank account(s) indicated by QI in writing from
time to time.
SECTION 6: REPRESENTATIONS AND WARRANTIES
------------------------------
6.1 QI represents and warrants that the Shippable Software DVD shall
meet the technical specifications contained in Schedule 1.7 in all material
respects.
6.2 QI represents and warrants that it has the full right and power
to enter into this Agreement and grant the licenses contained herein.
6.3 QI represents and warrants that it has no knowledge that QI
Software DVD or Shippable Software DVD infringes any Intellectual Property Right
of any third party.
6.4 ST represents and warrants that it has no knowledge that the ST
Product, when combined with QI Software DVD or Shippable Software DVD, infringes
any Intellectual Property Right of any third party.
6.5 QI represents and warrants that the QI Software DVD and
Shippable Software DVD shall be free of any known viruses.
6.6 QI represents and warrants that QI either owns the copyright in
the Shippable Software DVD or has been licensed to grant the rights and licenses
granted hereunder to ST.
6.7 QI represents and warrants that the QI Software DVD and
Shippable Software DVD does not incorporate any misappropriated trade secrets of
any third party.
6.8 QI represents and warrants that the Shippable Software DVD shall
be Year 2000 compliant in that it shall provide and/or receive data within and
between the 20th and 21st centuries, provided that all hardware, software and
firmware used with the Shippable Software DVD property exchanges accurate date
data with it.
6.9 QI represents and warrants that QI is a CSS Licensee and that
the Shippable Software DVD, when provided to ST, shall be CSS Compliant.
6.10 QI represents and warrants that QI is an AC-3 Licensee and the
Shippable Software DVD, when provided to ST, meets all the technical, marketing
and other requirements imposed by Dolby on its AC-3 Licensees.
9
<PAGE>
6.11 The parties each represent and warrant to the other that it
is a CSS Licensee and that it will at all times perform within the scope of its
duties under the CSS License Agreement.
6.12 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN (INCLUDING, BUT
NOT LIMITED TO, SECTION 6.1), QI MAKES NO OTHER WARRANTIES WHATSOEVER, EXPRESS
OR IMPLIED, WITH REGARD TO ANY SOFTWARE LICENSED HEREUNDER OR ANY PARTS THEREOF,
AND THAT QI EXPLICITLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY AND OF
FITNESS FOR A PARTICULAR PURPOSE. FURTHER, QI EXPRESSLY DOES NOT WARRANT THAT
THE SOFTWARE LICENSED HEREUNDER OR ANY PARTS THEREOF, WILL BE ERROR FREE, WILL
OPERATE WITHOUT INTERRUPTION OR WILL BE COMPATIBLE WITH ANY HARDWARE OR
SOFTWARE.
SECTION 7: CONFIDENTIALITY.
---------------
7.1 Confidentiality. ST acknowledges that the Proprietary Items
---------------
constitute trade secrets, proprietary property and/or confidential information
of QI; Accordingly, at all times during and after the date of this Agreement
(regardless of whether or not ST and QI are engaged in any business
relationship), without the prior written consent of QI:
(a) All Proprietary Items in ST's possession, will be held in
confidence by ST, and ST will not, directly or indirectly, communicate or
disclose any Proprietary Items to any Person or permit any Person to have access
to or possession of any Proprietary Items, except as necessary in connection
with ST's performance of its rights under this Agreement. ST agrees that any
Person to whom ST discloses any of the Proprietary Items, or who will have
access to the Proprietary Items, will have signed a confidentiality agreement,
in content substantially similar to the confidentiality provisions of this
Agreement.
(b) ST will take all reasonable measures necessary to preserve
the confidentiality of the Proprietary Items and to safeguard against
unauthorized disclosures and uses of the Proprietary Items, which measures shall
include the highest degree of care that ST utilizes to protect its own
Proprietary Items of a similar nature. ST agrees to notify promptly QI in
writing of any misuse, unauthorized disclosure or misappropriation of
Proprietary Items which may come to ST's attention.
(c) ST will not use or permit the use of any Proprietary Items
for any purpose, and ST will not make or retain any copy of any Proprietary
Items, except as necessary in connection with its performance under this
Agreement.
7.2 Legal Requirement to Disclose. ST may disclose Proprietary
-----------------------------
Items to other Persons, but only to the extent required under applicable law or
by a government order, decree, regulation or rule, provided that ST gives QI
reasonable written notice with sufficient opportunity to seek a protective order
prior to such disclosure.
7.3 Ownership of Proprietary Items. The Proprietary Items are and
------------------------------
will be and remain the exclusive property of QI. At QI's request, ST will
promptly destroy, erase or deliver to QI all copies of any documents containing
any Proprietary Items which are in ST's
10
<PAGE>
possession or control or the possession or control of any Person to whom
disclosed by or on behalf of ST under this Agreement except to the extent that
ST is not in breach of this Agreement and ST requires such Proprietary Items to
obtain the full benefits of its rights granted in this Agreement.
SECTION 8: SPECIFIC OBLIGATIONS OF ST
--------------------------
8.1 Exportation of Technical Data or Products. ST shall not,
-----------------------------------------
without the prior written consent of QI and the Office of Export Administrator,
United States Department of Commerce, knowingly re-export, export, or ship, or
cause to be re-exported, exported, or shipped, directly or indirectly, any
software licensed hereunder, or any related technology, or any direct or
indirect product thereof, to any country to which, under the laws of the United
States, QI is or may be prohibited from exporting its technology or its direct
or indirect product. The provisions of this paragraph shall extend automatically
to any other destination to which the U.S. Office of Export Administration at
any time during the life of this Agreement restricts or prohibits the export of
technical data or any direct or indirect product thereof.
8.2 Not Contest Validity. ST will not, directly or indirectly,
--------------------
during the Term of this Agreement or at any time thereafter, contest or aid
others in contesting, or do or fail to do anything impairing the validity or
enforceability of any of the rights granted by QI to ST hereunder or the
Proprietary Items anywhere in the world, or the validity of QI's ownership
rights therein. Notwithstanding the foregoing, nothing in this Agreement shall
be construed as prohibiting ST from contesting the validity of any patents
issuing from the foregoing.
SECTION 9: INDEMNIFICATION
---------------
9.1 Mutual. Each party agrees to defend, indemnify and hold
------
harmless the other party and its officers, directors, employees, agents and
contractors ("Indemnitees") from and against any and all claims, actions,
liabilities, obligations, damages, losses, demands, recoveries, deficiencies,
costs or expenses, including without limitation, reasonable attorneys fees and
expenses, which an Indemnitee may suffer or incur connected with, resulting from
or arising out of such party's breach of its representations, warranties and/or
covenants made in this Agreement.
9.2 Licensed Intellectual Property.
------------------------------
(a) QI agrees to defend, indemnify and hold harmless ST from and
against any and all claims, actions, liabilities, obligations, damages, losses,
demands, recoveries, deficiencies, costs or expenses, including without
limitation, reasonable attorneys fees and expenses, which ST may suffer or incur
connected with, resulting from or arising out of the infringement or
misappropriation of a third party Intellectual Property Right by the materials
supplied by QI, including QI Software DVD and/or Shippable DVD Software. The
foregoing indemnity will not apply to any infringement or misappropriation claim
arising from (i) any modifications to the Shippable DVD Software wherein the
claim arises as a result of such modification and the modification was made by
parties other than QI or a Person under QI's control, or (ii) any combination of
any Shippable DVD Software with other products or
11
<PAGE>
components where there would be no infringement absent such use with such other
products or components (excluding ST Products and/or software embedded therein).
(b) Notwithstanding the foregoing, QI shall have no obligation to
defend, indemnify or hold ST or any Affiliate harmless under this Agreement with
respect to any claims, actions, liabilities, obligations, damages, losses,
demands, recoveries, deficiencies, costs or expenses connected with, resulting
from or arising out of the infringement or misappropriation of any absolutely
necessary claim(s) of a patent(s) which reads on an industry standard for which
a license to such claim(s) is not available to QI on a reasonable and non-
discriminatory basis. An absolutely necessary claim(s) of a patent(s) is a
claim(s) which is infringed by the manufacture, import, use or sale of the QI
Software DVD or Shippable Software DVD which is compliant with an industry
standard, such as the CSS Compliant standard for DVD, because the QI Software
DVD or Shippable Software DVD, solely because of the requirement to implement
the standard, cannot be manufactured, used, distributed, offered to be sold,
sold, imported and/or otherwise transferred without infringing such claim(s).
The claim of a third party patent is not an absolutely necessary claim if it
would be obvious to one ordinarily skilled in the art that the claim can be
designed around and the QI Software DVD or Shippable Software DVD would still be
compliant with the industry standard.
(c) Notwithstanding any provisions of the Agreement to the contrary,
and without limiting the generality of Section 9.2(b), QI will not be
responsible for the payment of any license fees with respect to any patent(s)
licensed by MPEG-LA, which license fees would be due or payable as a result of
the manufacture, use, distribution, offering for sale, sale, import or export of
any ST product or an ST Customer product.
9.3 Requirements. The indemnification provisions set forth herein
------------
are predicated on the indemnitee giving prompt written notice of any claim for
which indemnification is required, tender the defense of any such claim to the
indemnifying party, providing full cooperation for such defense at the
indemnifying party's expense, and not settling without the indemnifying party's
prior written approval, not to be unreasonably withheld. The indemnitee may
participate in any such defense or settlement with counsel of its own choosing
at its own expense.
9.4 Options. If any of the software licensed hereunder becomes, or
-------
in QI's opinion is likely to become, the subject of a claim of infringement,
then ST will permit QI, at QI's option and expense, (a) to procure for ST the
right to continue using the same under the terms of this Agreement or (b) to
replace or modify the same so that it becomes non-infringing and equivalent in
function.
9.5 EXCLUSIVE OBLIGATIONS. THE PROVISIONS OF THIS SECTION 9 ARE
---------------------
QI'S EXCLUSIVE OBLIGATIONS WITH RESPECT TO INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS.
SECTION 10. TRADEMARKS.
----------
The Shippable Software DVD will incorporate ST Trademarks. The
Shippable Software DVD incorporated on Licensed Products will also, within QI's
discretion, include QI's
12
<PAGE>
logo or banner on the installation screen and QI's copyright notice in the
"about" section of the program.
SECTION 11: TERM AND TERMINATION.
--------------------
11.1 Term. Unless otherwise terminated under this Section, this
----
Agreement shall commence on the Effective Date and shall continue for an initial
term of three (3) years from the Effective Date.
11.2 Termination of Agreement. This Agreement may be terminated at
------------------------
any time by a party for material breach of this Agreement by the other party, if
such breaching party does not cure such breach within thirty (30) days after
receiving written notice thereof. The parties acknowledge that non-payment of
royalties or other payments hereunder when due is a material breach.
Notwithstanding the foregoing, the cure period for non-payment of royalties or
other payments hereunder shall be five (5) days after receipt of written notice
of such breach.
11.3 Termination of License Grant. Notwithstanding any other
----------------------------
provision of this Agreement, QI may terminate the rights and license granted to
ST under Section 4: (a) if ST has breached its payment obligations to QI, and QI
terminates the Agreement in accordance with Section 11.2 for such breaches.
11.4 Survival. The rights and obligations contained in the
--------
following sections shall survive any termination or expiration of this
Agreement: Sections 3, 4 (except as provided in Section 11.3), 5, 6, 7, 8, 9,
10, 12, and 13.
11.5 Reservation of Rights and Remedies. Upon termination of this
----------------------------------
Agreement for any reason, each party shall have all rights and remedies
available to it in law or in equity with respect to the other party.
SECTION 12: CHOICE OF LAWS; CONSENT TO JURISDICTION; LIMITATION OF LIABILITY,
----------------------------------------------------------------
12.1 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the substantive laws of the State of Delaware,
U.S.A. In the event that any legal action or other proceeding is commenced to
enforce any provision of this Agreement or as a result of a breach, default or
misrepresentation in connection with any provision of this Agreement, the
successful or prevailing party shall be entitled, in addition to any other
relief which said party may be entitled, to recover reasonable attorneys' fees
and costs of litigation incurred in such action or proceeding.
12.2 Limitation of Liability.
-----------------------
(a) Except for Sections 5.1, 5.2 and 9.2, in no event shall either
party be liable to the other party for actual damages resulting from claims
relating to this Agreement which in the aggregate exceed * regardless of the
form of action, provided that this limitation will not apply to claims for
bodily injury or damage to real property for which a party is legally liable.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
13
<PAGE>
(b) With respect to QI's obligations to indemnify, defend and hold
ST harmless under 9.2, in no event shall QI financial responsibility under
Section 9.2 in the aggregate exceed two and one-half million U.S. dollars
($2,500,000 USD) ("QI's Indemnification Cap"). To the extent that any claims,
actions, liabilities, obligations, damages, losses, demands, recoveries,
deficiencies, costs or expenses, including without limitation, reasonable
attorneys fees and expenses, which ST may suffer or incur connected with,
resulting from or arising out of the infringement or misappropriation of a third
party Intellectual Property Right by the materials supplied by QI, including QI
Software DVD and/or Shippable DVD Software, exceed in the aggregate QI's
Indemnification Cap, then ST shall be responsible therefor.
(c) In no event shall either party be liable to the other party
for incidental damages, lost profits, lost savings, or any other consequential
damage, regardless of whether the claim is for breach of contract, warranty,
tort (including negligence), failure of a remedy to accomplish its purpose or
otherwise, even if such party has been advised of the possibility of such
damages. Except as stated in Section 9, neither party shall be liable for any
damages claimed by the other party based on any third party claim.
SECTION 13: FORCE MAJEURE
-------------
Neither party to this Agreement will be liable to the other for any
failure or delay in performance under this Agreement due to circumstances beyond
its reasonable control including, without limitation, Acts of God, accident,
labor disruption, acts, omissions and defaults of third parties, and official,
governmental and judicial action not the fault of the party failing or delaying
in performance.
SECTION 14: NON-DISCLOSURE OF IDENTITY OF QI
--------------------------------
14.1 Prior to October 1, 1998, neither ST nor any Affiliate shall
make any public disclosure of the fact that ST has entered into this Agreement
with QI or that ST will be incorporating QI software or technology in ST's
products. Prior to October 1, 1998, ST may disclose to its customers that ST
will be incorporating QI software or technology in ST's products, provided,
---------
however, that any customer to whom ST discloses such information is first bound
- -------
under a written confidentiality agreement not to disclose to any Person, prior
to October 1, 1998, the fact that QI software or technology will be incorporated
in such customer's equipment or the fact that ST will be incorporating QI
software or technology in ST's products.
14.2 ST shall not be bound by the non-disclosure obligations under
Section 14.1 to the extent that ST is required to make such a disclosure by law
or by governmental administrative order.
SECTION 15: MISCELLANEOUS
-------------
15.1 Notices. Notices by either party to the other shall be given
-------
by registered or certified mail, return receipt requested, or by telegram, with
proof of delivery, all charges prepaid. All statements, and notices hereunder
shall be given at the respective addresses of QI and ST as set forth on the
first page of this Agreement unless written notice of a change of
14
<PAGE>
address is given. Notices shall be deemed effective the date the notice is
given, except that notices of change of address shall be effective when
received.
15.2 Public Announcements. No press release or public notice
--------------------
relating to this Agreement may be made by either party without receiving the
other party's prior written consent except where same may be required by law or
administrative rule. If requested by one party, the other party shall promptly
supply the other party with copies of all public statements and of all publicity
and promotional material relating to this Agreement and the sale and promotion
of QI Software DVD.
15.3 Relationship between Parties. The relationship between ST and
----------------------------
QI is that of independent contractors, and not partners, joint ventures or
agents. Neither party has any authority to bind the other party in any manner.
Neither party will be liable for any debts or liabilities of the other party,
and, except as otherwise provided in this Agreement, each party will be
responsible for its own expenses incurred in performing its obligations under
this Agreement.
15.4 Entire Understanding. This Agreement, together with the
--------------------
Exhibits and Schedules to this Agreement, state the entire understanding between
the parties with respect to the subject matter hereof and supersede all earlier
and contemporaneous oral and written communications and agreements with respect
to the same subject matter. Neither this Agreement, nor any other Exhibit or
Schedule to this Agreement, may be amended or modified except in a written
document signed by both parties.
15.5 Additional Documents. Each of the parties hereto shall take or
--------------------
cause to be taken all action, or do or cause to be done all things, or execute
and deliver any and all documents, instruments and writings, necessary,
convenient, proper or advisable to consummate, make effective, and carry out the
terms and provisions of this Agreement.
15.6 Parties in Interest. This Agreement will bind, benefit, and be
-------------------
enforceable by QI and ST, and their respective successors and, to the extent
permitted hereby, assigns. Without the prior written consent of a party, the
other party may not assign or subcontract any of its rights or obligations under
this Agreement to any Person. Nothing herein expressed or implied is intended
or shall be construed to confer upon or to give to any Person, other than the
parties hereto, their respective successors and permitted assigns, any rights or
remedies under or by reason of this Agreement.
15.7 No Waivers. No failure to exercise, delay in exercising, or
----------
single or partial exercise of any right, power or remedy by either party, and no
course of dealing between the parties, will constitute a waiver of, or will
preclude any other or further exercise of, the same or any other right, power or
remedy.
15.8 Severability. If any provision of this Agreement is construed
------------
to be invalid, illegal or is unenforceable, then the remaining provisions will
not be affected thereby and will be enforceable without regard thereto.
15
<PAGE>
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF AS OF THE DATE FIRST
STATED ABOVE.
QUADRANT INTERNATIONAL, INC. STMICROELECTRONICS, INC.
By: /s/ Jason Liu By: /s/ Tim Chambers
------------------------------ -------------------------------
Name: Jason Liu Name: Tim Chambers
---------------------------- -----------------------------
Title: Chief Financial Officer Title: VP/GM Graphics Products
---------------------------- -----------------------------
16
<PAGE>
EXHIBIT 10.6
SOURCE AND OBJECT CODE LICENSE AGREEMENT
This Source and Object Code License Agreement (the "Agreement") is entered into
as of September 1, 1998 ("Effective Date") by and between Microsoft Corporation,
a Washington corporation located at One Microsoft Way, Redmond, Washington
98052-6399 ("Microsoft"), and the company identified below ("Company").
RECITALS
Company is the owner or authorized licensor of certain software for which
Company would derive a benefit from wider distribution by Microsoft; and
Microsoft desires to license the Code from Company to distribute to end users of
certain Microsoft software operating system products.
AGREEMENT
In consideration of the respective rights and obligations set out below, the
parties agree as follows:
1. Definitions.
------------
1.1 "Code" shall mean the Company source and object code (including,
but not limited to source files of type .ASM, .C, .H, .RC, etc.) necessary to
create the software described on Exhibit A, including any documentation, bug
fixes, enhancements, additions, or other modifications to the Code that Company
provides to Microsoft under this Agreement.
1.2 "Derivative Technology" shall mean: (a) for copyrightable or
copyrighted material, any translation (including translation into other computer
languages), port, modification, correction, addition, extension, upgrade,
improvement, compilation, abridgment or other form in which an existing work may
be recast, transformed or adapted; (b) for patentable or patented material, any
improvement thereon; and (c) for material which is protected by trade secret,
any new material derived from such existing trade secret material, including new
material which may be protected by copyright, patent and/or trade secret.
1.3 "MS Modified Code" shall mean the modifications made to the Code
by or for Microsoft, as combined with the Code, that Microsoft provides to
Company under this Agreement.
2. License Grants. The parties agree to the following license grants:
--------------
2.1 Code. Company hereby grants to Microsoft, under all Company's
----
intellectual property and proprietary rights, the following worldwide,
nonexclusive, perpetual,
<PAGE>
irrevocable, royalty-free, fully paid up rights: (a) make, use, reproduce,
modify and create Derivative Technology of the Code; (b) publicly perform or
display, import, broadcast, transmit, distribute, license, offer to sell and
sell, rent, lease or lend copies of the Code and Derivative Technology thereof,
and (c) sublicense to third parties the foregoing rights, including the right to
sublicense to further third parties.
2.2 Limitation on Source Code Distribution. Notwithstanding anything
--------------------------------------
to the contrary herein, Microsoft may only distribute the Code in source code
form to third parties under the following circumstances: (a) where the source
code is sublicensed to licensees of Microsoft source code as part of a Microsoft
operating system product in source code form, and such sublicensee is subject to
an agreement between Microsoft and such Microsoft license contains terms which
protect the source code of the Code to the same extent as Microsoft source code;
provided, however, that Microsoft shall exercise commercially reasonable efforts
not to disclose the Code in source code form to the following companies that
distribute products which are competitive to Company's products: C-Cube,
Panasonic/Matsushita, and IBM; or (b) to a contractor or consultant doing work
for Microsoft, and such contractor or consultant is subject to confidentiality
provisions consistent with those imposed by Microsoft with respect to its own
source code; or (c) to other third parties when Company has approved of such
distribution in writing, and the source code is subject to a non-disclosure
agreement with provisions consistent with those imposed by Microsoft with
respect to its own source code.
2.3 MS Modified Code. Microsoft hereby grants to Company, under all
----------------
Microsoft's intellectual property and proprietary rights, the following
worldwide, nonexclusive, perpetual, irrevocable, royalty-free, fully paid up
rights: (a) make, use, reproduce, modify and create Derivative Technology of the
MS Modified Code, in source and object code forms, solely for use with Microsoft
operating system products; (b) publicly perform or display, import, broadcast,
transmit, distribute, license, offer to sell and sell, rent, lease or lend
copies of the MS Modified Code and/or Derivative Technology thereof, in source
and object code forms, solely for use with Microsoft operating system products;
and (c) sublicense to third parties the foregoing rights, including the right to
sublicense to further third parties.
3. No Obligation. This Agreement is intended to provide the parties with an
-------------
ongoing ability to exchange Code and MS Modified Code as the need or desire
arises. In no event shall the license grants in Section 2 of this Agreement be
construed either as an obligation on either party's part to use or distribute
the Code or MS Modified Code; or as an obligation on either party's part to
provide the other party with modifications a party may make to the MS Modified
Code and the Code.
4. Ownership.
---------
4.1 Except as expressly licensed to Microsoft under Section 2.1,
Company retains all right, title and interest in and to the Code; provided,
however, that, subject to the license grant in Section 2.1 and Company's
ownership of the underlying Code, Microsoft shall own all right, title and
interest in and to any Derivative Technology of the Code created by or for
Microsoft.
2
<PAGE>
4.2 Except as expressly licensed to Company under Section 2.3,
Microsoft retains all right, title and interest in and to the MS Modified Code;
provided, however, that, subject to the license grant in Section 2.3 and
Microsoft's ownership of the underlying MS Modified Code, Company shall own all
right, title and interest in and to any Derivative Technology of the MS Modified
Code created by or for Company.
5. Intellectual Property Warranty. Company warrants: (a) that Company has not
------------------------------
granted and will not grant any rights in the Code to any third party which grant
is inconsistent with the rights granted to Microsoft in this Agreement; and (b)
that the Code does not infringe any patent, trade secret, copyright or other
proprietary right held by a third party.
6. Code Warranty. Company warrants that the Code as provided will be able to
-------------
pass Microsoft's standard certification tests for Windows device support code.
To the extent that any or all of the Code is not able to pass the certification
tests or program errors are discovered following certification testing, Company
agrees to make all reasonable efforts to correct the Code promptly upon
notification of the problem by Microsoft.
7. Support for Code.
----------------
7.1 End User Support. Company shall be responsible for providing
----------------
end user support, either directly or indirectly (e.g., through OEM distribution
or a reputable third party technical support provider) for the Code and for all
MS Modified Code. Upon Microsoft's request, Company shall also assist Microsoft
as reasonably necessary to support third parties that have received the Code and
MS Modified Code from Microsoft.
7.2 Development Support. For a period of five (5) years from the
-------------------
Effective Date, Company shall provide to Microsoft the following development
support for the Code: (a) maintain contacts at Company to assist Microsoft
developers in supporting the Code; (b) deliver corrections and enhancements to
the Code, in beta and final forms, no later than they are provided to any other
customers; and (c) use commercially reasonable efforts to correct promptly all
errors or defects in the Code reported by Microsoft and deliver such corrections
to Microsoft.
8. Independent Development. Nothing in this Agreement shall impair
-----------------------
Microsoft's right to acquire, license, develop for itself, or have others
develop for it, similar technology performing the same or similar functions as
the Code, or to market and distribute such similar technology in addition to, or
in lieu of, the Code.
9. Limitation of Liabilities. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT,
-------------------------
INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS PROVISION SHALL HAVE NO
APPLICATION TO SECTION 5.
10. Indemnification.
---------------
10.1 Indemnification. Company shall, at its expense and Microsoft's
---------------
request, defend any claim or action brought against Microsoft, and Microsoft's
affiliates, directors, officers, employees, agents and independent contractors,
to the extent it is based upon a claim
3
<PAGE>
that, if true, would constitute a breach of any Company obligation or warranty
under this Agreement ("Company Claims"); and Company will indemnify and hold
Microsoft harmless from and against any costs, damages and fees reasonably
incurred by Microsoft, including but not limited to fees of attorneys and other
professionals, that are attributable to such Company Claims. For claims or
actions the defense of which is tendered to Company under this Section 10,
Microsoft shall: (a) provide Company reasonably prompt notice in writing of any
such Company Claims and permit Company, through counsel chosen by Company and
reasonably acceptable to Microsoft, to answer and defend such Company Claims;
and (b) provide Company information, assistance and authority, at Company's
expense, to help Company to defend such Company Claims. With regard to any claim
or action the defense of which is tendered to Company under this Section 10,
Company will not be responsible for any settlement made by Microsoft without
Company's written permission, which permission will not be unreasonably
conditioned, withheld or delayed. Microsoft shall have the right, at its option
and expense, to retain its own counsel and to participate in such defense.
10.2 Settlement of Claim. Company may not settle any Company Claim
-------------------
under this Section 10 on Microsoft's behalf without first obtaining Microsoft's
written permission, which permission will not be unreasonably withheld or
delayed. In the event Microsoft and Company agree to settle a Company Claim,
Company agrees not to publicize the settlement without first obtaining
Microsoft's written permission, which permission will not be unreasonably
withheld or delayed.
11. Government Restricted Rights. Any Code or MS Modified Code which either
----------------------------
party distributes or licenses to or on behalf of the United States of America,
its agencies and/or instrumentalities (the "Government"), are provided with
RESTRICTED RIGHTS. Use, duplication or disclosure by the Government is subject
to restriction as set forth in subparagraph (c)(1)(ii) of the rights in
Technical Data and Computer Software clause at DFAR 252.227-7013, or as set
forth in the particular department or agency regulations or rules which provide
protection equivalent to or greater than the above-cited clause. Both parties
shall comply with any requirements of the Government to obtain such RESTRICTED
RIGHTS protection, including without limitation, the placement of any
restrictive legends on the software, documentation, and any license agreement
used in connection with the distribution thereof.
12. Export Restrictions. Both parties agree that the Code and MS Modified Code
-------------------
are subject to the export control laws and regulations of the United States, and
any amendments thereof. Each party confirms that with respect to the Code and
MS Modified Code it will not export or re-export it, directly or indirectly,
either to (a) any countries that are subject to United States export
restrictions (currently including, but not necessarily limited to, Cuba, Sudan,
Iran, Iraq, Libya, North Korea, and Syria); (b) any end user who a party knows
or has reason to know will utilize the Code or MS Modified Code in the design,
development or production of nuclear, chemical or biological weapons; or (c) any
end user who has been prohibited from participating in the United States export
transactions by any federal agency of the United States government. Each party
further acknowledges that the Code and MS Modified Code may include technical
data subject to export and re-export restrictions imposed by United States law.
4
<PAGE>
13. General.
-------
13.1 Governing Law; Attorneys' Fees. This Agreement shall be
------------------------------
construed and controlled by the laws of the State of Washington, and Company
consents to exclusive jurisdiction and venue in the federal courts sitting in
King County, Washington, unless no federal subject matter jurisdiction exists,
in which case Company consents to exclusive jurisdiction and venue in the
Superior Court of King County, Washington. Company waives all defenses of lack
of personal jurisdiction and forum nonconveniens. Process may be served on
either party in the manner authorized by applicable law or court rule. If
either Microsoft or Company employs attorneys to enforce any rights arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover its costs, including reasonable attorneys' fees.
13.2 Relationship between Parties. Company is an independent
----------------------------
contractor with Microsoft. Nothing in this Agreement shall be construed as
creating an employer-employee relationship, a partnership, a franchise, or a
joint venture between the parties.
13.3 Severability. If for any reason a court of competent
------------
jurisdiction finds any provision of this Agreement, or portion thereof, to be
unenforceable, that provision of the Agreement will be enforced to the maximum
extent permissible so as to effect the intent of the parties, and the remainder
of this Agreement will continue in full force and effect. This Agreement has
been negotiated by the parties and their respective counsel and will be
interpreted fairly in accordance with its terms and without any strict
construction in favor of or against either party.
13.4 No Waiver. No failure or delay on the part of either party in
---------
the exercise of any right, power or remedy under this Agreement or under law, or
to insist upon or enforce performance by the other party of any of the
provisions of this Agreement or under law, shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or remedy preclude
other or further exercise thereof, or the exercise of any other right, power or
remedy; rather the provision, right, or remedy shall be and remain in full force
and effect.
13.5 Entire Agreement; Amendments. This Agreement constitutes the
----------------------------
entire agreement between the parties with respect to the subject matter
contemplated herein, and merges all prior and contemporaneous communications.
The Agreement shall not be modified except by a written amendment to this
Agreement dated subsequent to the Effective Date and signed by duly authorized
representatives of both parties.
5
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the Effective Date.
MICROSOFT CORPORATION QUADRANT INTERNATIONAL
One Microsoft Way 1 Great Valley Parkway
Redmond, WA 98052-6399 Malvern, PA 19355
Signature: __________________________ Signature: /s/ Michael R. Harris
--------------------------
Name (Print): _______________________ Name (Print): Michael R. Harris
-----------------------
Title: ______________________________ Title: Chief Technology Officer
-----------------------------
6
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EXHIBIT 10.7
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (the "Agreement") is effective as of
March 2, 1998 (the "Effective Date") and made by and between ATI Technologies
Inc.("ATI"), an Ontario corporation, with a principal place of business at 33
Commerce Valley Dr., Thornhill, Ontario, L3T 7N6 and Quadrant International,
Inc. ("QI"), a Pennsylvania corporation located at 269 Great Valley Parkway,
Malvern, Pennsylvania 19355 U.S.A.
RECITALS
ATI is in the business of developing integrated circuits and more
specifically graphics and multimedia controller integrated circuits.
QI is the owner of a software DVD product currently marketed by QI under the
brand name CINEMASTER.
ATI wishes to license rights to QI's current and future software DVD products
and QI desires to grant such rights to ATI.
NOW THEREFORE, intending to be legally bound and in consideration of
the mutual promises herein, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Definitions. The following definitions apply to this Agreement:
-----------
1.1. "ATI Affiliate" means a company or entity which ATI effectively owns
or controls, directly or indirectly, more than fifty (50%) of the
voting stock or ownership interest therein.
1.2. "AC-3 Licensee" shall mean anyone licensed by Dolby Laboratories
Licensing Corporation ("Dolby"), a corporation organized under the
laws of the State of New York, having its principle place of business
at 100 Potrero Avenue, San Francisco, California 94103, to
manufacture products containing digital audio coding technology known
as Dolby AC-3 .
1.3. "ATI Trademarks" shall mean ATI's trademarks, service marks and
logos.
1.3. "CSS Compliant" shall mean a DVD product which complies with CSS
Specifications.
1.4. "Entity" shall mean the organization to administer CSS currently
being established by MEI, Toshiba and other DVD industry members.
1.5. "CSS Licensee" shall mean anyone that enters into a CSS License
agreement with MEI or the Entity to the extent such agreement is
valid and in effect. ATI and QI are CSS Licensees.
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
1.6. "CSS" shall mean Contents Scramble System developed by MEI and
Toshiba to provide protection for the contents of digital versatile
discs (DVD discs) as described in CSS Specifications.
1.7. "CSS Specification" shall mean the documentation relating to CSS
entitled "CSS Specifications", including Procedural Specifications
and Technical Specifications, that MEI makes available to a CSS
Licensee.
1.8. "Derivative" shall mean (a) for copyrightable or copyrighted
material (including materials subject to mask work rights), a work
which is based upon one or more pre-existing works, such as a
revision, modification, translation, abridgment, condensation,
expansion, collection, compilation, or any other form in which such
pre-existing works may be recast, transformed, or adapted; (b) for
patentable or patented materials, any adaptation, addition,
improvement, or combination based on a preexisting work; and (c) for
material subject to trade secret protection, any new material,
information, or data relating to and derived from such existing
trade secret material, including new material which may be
protectable by copyright, patent, or other proprietary rights.
1.9. "Deliverables and Development Schedule" shall mean the mutually
agreed upon deliverables and schedule as described in the Marketing
Requirements Document set out in Exhibit A and as revised from time
---------
to time by mutual written agreement of the parties.
1.10. "Documentation" shall mean user manuals and other written materials
that relate to QI's Software DVD, including materials useful for
design (for example, logic manuals, flow charts, and principles of
operation), and machine-readable text or graphic files subject to
display or print-out which comply with CSS, Dolby and Macrovision
license requirements. The definition of "Documentation" excludes
those written materials that might otherwise come within the
definition but for which QI is prohibited from providing to ATI
because QI is contractually bound with one or more third parties not
to disclose such materials due to their confidential nature.
1.11. "Dolby Certified" shall mean the design approval and performance
testing by Dolby of an AC-3 product to be manufactured by an AC-3
Licensee.
1.12. "Dolby Royalties" shall mean royalties payable to Dolby pursuant to
an AC-3 license by an AC-3 Licensee.
1.13. "Version" shall mean new versions of software incorporating new or
next generation acceleration features in ATI integrated circuit
products. Other maintenance modifications or revisions to correct
any mistake, problem or defect causing incorrect or non-functioning
of the software, or new releases that improve functions, add new
functions or features or improve performance by changes in system
design or coding not directly related to ATI acceleration hardware
shall not be deemed such new versions.
2
<PAGE>
1.14. "Intellectual Property Rights" shall mean (a) all Patent Rights; (b)
all trade secret rights arising under the laws of any jurisdiction;
(c) all United States and foreign semiconductor mask work rights and
registrations for such rights; and (d) all copyright rights and all
other literary property and author rights, whether or not
copyrightable, and all copyrights and copyrighted interests,
including any renewals thereof but will not include any rights in
any trademarks, trade names, service marks, logos and the goodwill
associated therewith. "Patent Rights" shall mean all United States
and foreign letters patent and applications for letters patent,
industrial models, industrial designs, utility models, certificates
of invention, and other indicia of invention ownership, including
any such rights granted upon any reissue, division, continuation or
continuation-in-part applications now or hereafter filed.
1.15. "Level 1 Support" shall mean support for End Users relating to
program usage, program and hardware compatibility and program
requirements
1.16. "Level 2 Support" shall mean technical support which is back-up for
Level 1 Support and isolates problems and defects relating to
program and hardware compatibility and program requirements.
1.17. "Level 3 Support" shall mean development and manufacturing support
to fix program defects.
1.18. "Macrovision" shall mean Macrovision Corporation, a Delaware
corporation, having its principal place of business at 1341 Orleans
Drive, Sunnyvale, California 94089.
1.19. "Macrovision Certified" shall mean the provision of a certificate by
Macrovision evidencing testing and approval.
1.20. "Microsoft Certified" shall mean the provision of a certificate by
Microsoft evidencing WHQL (Windows Hardware Quality Labs) qualified
and/or approved.
1.21. "Object Code" shall mean the machine readable form computer
programming code as opposed to the human readable form of computer
programming code.
l.22. "Project Manager" shall mean the primary contact person designated
by each party in writing, who will coordinate the activities of the
parties hereunder. Each party may change its designated Project
Manager from time to time during the term of this Agreement by
written notice.
1.23. "QI Software DVD" shall mean software DVD developed by QI and
currently marketed under the brand name Cinemaster and all
subsequent versions and modifications thereof and enhancements and
Derivatives thereto and tools, including diagnostic tools and
utilities used in QI's software DVD build process.
3
<PAGE>
1.24. "Accelerated Software DVD" shall mean QI Software DVD including
motion compensation or any other form of hardware assisted
acceleration provided by a graphics component.
1.25. "Unaccelerated Software DVD" shall mean QI Software DVD not
including motion compensation or any other form of graphics hardware
assisted acceleration.
1.26. "Hardware DVD" shall mean an ATI board and supporting software
including QI's DVD application software or a Derivative thereof used
in combination with the IBM CD1. 1 MPEG2 decoder.
1.27. "Source Code" shall mean the human readable form computer
programming code and related system level documentation, including
all comments and any procedural code such as job control language.
1.28. "Shippable Software DVD" shall mean a version of the QI Software DVD
which is CSS Compliant and has been Dolby Certified, Macrovision
Certified, Microsoft Certified and meets any further certification
obligations, including DVD, imposed as a requirement to provide DVD
products and has met and passed all of ATI's internal quality
assurance tests and qualifications.
1.29. "Video Encoder Software" shall mean QI's real-time software video
encoder engine as set out in Schedule A.
1.30. "Viona" shall mean Viona Development Hard & Software Engineering
GmbH, a German corporation located at Karlstrasse 27, Karlsruhe D
76133 Germany.
1.31 As used herein, the terms "sale," "sell," or "sold" in the context
of a copy of any software product hereunder means the sale, or other
disposition, of a license for a copy of such software but shall not
include samples or upgrades provided to correct any mistake, problem
or defect in the software.
2. Responsibilities and Obligations.
--------------------------------
2.1. Upon execution of this Agreement, QI shall provide ATI with the
current version of QI Software DVD in Object Code form. QI shall
work with ATI in accordance with the Deliverables and Development
Schedule to provide future enhanced versions of the QI Software DVD.
2.2. The parties shall assist each other in testing and certifying the QI
Software DVD as required under the parties' respective CSS License
agreements.
2.3. QI shall deliver to ATI, as early as possible, but not later than
April 30th, 1998, Shippable Software DVD and supporting
Documentation for ATI to sell and distribute in accordance with the
terms of this Agreement.
4
<PAGE>
2.4. During the term of this Agreement QI will deliver to ATI the Source
Code for QI Software DVD. The first delivery of such Source Code
will be made promptly after ATI has made its first royalty payment
to Ql hereunder. The parties acknowledge and agree the Source Code
contain trade secrets and proprietary information of third parties;
and that QI is contractually bound not to disclose the Source Code
to others, including ATI. Accordingly, QI will not deliver to ATI
such portions of the Source Code that contain or comprise trade
secrets or proprietary information of any third parties unless the
license with said third party permits delivery to ATI. QI will
deliver to ATI, from time to time, only such portions of the Source
Code for QI Software DVD that does not contain or comprise trade
secrets or proprietary information of any third parties.
2.5. QI shall promptly provide to ATI any Derivatives, improvements,
modifications, enhancements, or bug fixes made to QI Software DVD or
Shippable Software DVD during the term of this Agreement.
2.6. ATI shall provide Level 1 and Level 2 Support to ATI customers. QI
shall provide, at no additional charge, Level 3 Support directly to
ATI for Shippable Software DVD for the full term of the Agreement.
In the event of a critical bug or problem severely restricting the
operations of an OEM or reseller, QI will make best efforts to fix
the problem within two business days. In the event that QI is unable
to fix the problem within such two business days, QI will provide
ATI with a written detailed plan, including a schedule and outlining
the problem and possible resolutions.
2.7. If either party's CSS License requires any modification or
enhancement to the Shippable Software DVD, QI shall modify the
Shippable Software DVD currently being distributed by ATI, as soon
as reasonably possible, to ensure the software is CSS Compliant
within the time period required by both parties' CSS License and the
CSS Specifications.
2.8. During the term of this Agreement, QI shall designate an appropriate
number of its engineering staff members to work with ATI in
accordance with the Development Schedule.
2.9. The Project Managers shall schedule formal meetings at mutually
agreeable times during the term hereof, to be attended by personnel
of each party, to discuss the status of the Deliverables and
Development Schedule.
2.10. QI shall use best efforts to obtain rights to sublicense any third
party rights encompassed within the Deliverables and/or
Documentation to ATI.
3. Ownership.
---------
Intellectual Property Rights arising, developed or delivered hereunder shall be
owned as follows: Intellectual Property Rights originated, discovered or
developed by ATI, shall be owned by ATI, and Intellectual Property Rights
originated, discovered or developed by QI shall be owned by QI.
5
<PAGE>
Intellectual Property Rights originated, discovered or developed jointly by both
parties ("Jointly Owned Intellectual Property") shall be jointly owned and each
party shall have the unrestricted right under Jointly Owned Intellectual
Property to make, use, sub-license and/or sell any product anywhere in the
world, in Object Code form only, without any restriction by the other party.
Both parties agree to execute without further consideration any and all further
documents or assurances as may be necessary to effect the above or to assist one
party in protecting (including the filing of patents) the Jointly Owned
Intellectual Property. To the extent that any ATI owned Intellectual Property
Rights or any Jointly Owned Intellectual Property Rights comprise or contain
derivative works based on owned Intellectual Property Rights, then ATI will pay
to QI a Royalty for the sale of each copy of such work a royalty in accordance
with Section 7. For purposes of the foregoing sentence, and for purposes of
Section 7 of this Agreement, a `derivative work', shall be as defined by, and
interpreted under, the Copyright Act of 1976, as amended, 17 U.S.C. (S) 101.
4. License Grants.
--------------
4.1 ATI and QI hereby grant to each other a world-wide, non-exclusive
license under Intellectual Property Rights covering the manufacture,
development, importation, offer for sale, sale, modification, or use
of Derivatives of QI Software DVD, Shippable Software DVD, Video
Encoder Software and/or Hardware DVD, but only for sale or
distribution in Object Code form.
4.2 QI hereby grants ATI a world-wide, non-exclusive, license under the
QI Intellectual Property Rights to use, reproduce and modify QI
Software DVD, Shippable Software DVD, Video Encoder Software,
Hardware DVD and Documentation for the purpose of supporting and
developing existing and future ATI and QI products.
4.3 QI hereby grants ATI a world-wide, non-exclusive (subject to the
exclusivity provisions set out below), license under QI Intellectual
Property Rights to make, import, offer for sale and sell the
Shippable Software DVD, QI Software DVD, Video Encoder Software and
Hardware DVD but solely in Object Code. ATI has the right to
sublicense ATI Affiliates the right to import, offer for sale and
sell such Shippable Software DVD, QI Software DVD, Video Encoder
Software and Hardware DVD.
4.4 ATI and ATI's permitted sublicensees may only sell or distribute any
software hereunder comprising Shippable Software DVD, QI Software
DVD, Video Encoder Software and Hardware DVD, and Derivatives of the
foregoing, in such manner that ATI would have the ability to account
for, and does in fact account for, the exact number of such copies
of the software sold or distributed so that the appropriate royalty
payments may be made to QI hereunder.
4.5 ATI will only permit independent contractors to have access to the
Source Code if QI has given its prior written approval to have such
access, and the independent contractor has signed a non-disclosure
agreement. ATI shall be primarily
6
<PAGE>
responsible for all unauthorized uses and/or disclosures of such
Source Code by any employee or independent contractor of ATI,
notwithstanding the fact that such person may have signed non-
disclosure, non-competition and or other agreement with QI.
5. Exclusivity.
-----------
For each new Version of the Accelerated Software DVD that QI develops and
delivers to ATI, ATI shall have a limited period of exclusivity, during which QI
will not sell such Version of the Accelerated Software DVD to third parties (the
"Exclusivity Period") as set forth in this Section. The Exclusivity Period for
each new Version of the Accelerated Software DVD shall extend from the date that
ATI first sells or ships Shippable Software DVD incorporating such new Version
until either six (6) months thereafter, or the date that ATI first sells or
ships Shippable Software DVD incorporating the next new Version, whichever is
earlier. The parties agree that with respect to the first Version of the
Accelerated Software DVD that QI is delivering to ATI hereunder, the Exclusivity
Period shall not extend beyond October 1, 1998. ATI has the option of
terminating its right to have such Exclusivity Periods, on written notice to QI
at any time up to sixty (60) days prior to the end of the first year of the
first term of this Agreement. In the event of timely termination of its right
to have such Exclusivity Periods as set forth in the preceding sentence, ATI
will not be obligated to prepay a minimum royalty during the second year of the
first term of this Agreement. Except as set forth in Section 7.7, QI agrees
that during each respective Exclusivity Period, QI will not sell, license or
distribute the Shippable Software DVD incorporating such new Version of QI
Software DVD to any third party. The parties acknowledge and agree that
Versions of QI Software DVD that incorporate Unaccelerated Software DVD shall
not be subject to any Exclusivity Period.
ATI shall, for the term of this Agreement, have the exclusive right to market
and sell QI Software DVD for use in association with ATI graphics components.
For (3) three months after QI delivers a Shippable Software DVD capable of
running on a Windows NT operating system ("NT Software DVD"), ATI shall have
exclusivity during which time QI shall not sell or license the NT Software DVD
to any other third party.
6. Right of First Refusal.
----------------------
ATI and QI each acknowledge that it is their respective intentions to work
together on an ongoing basis to build a mutually beneficial business
relationship. ATI and QI acknowledge that there may be future projects under
which the parties could collaborate including but not limited to digital TV
decoding. QI agrees to discuss any QI initiated future development projects with
ATI to assist the parties in determining whether future collaboration or teaming
between the parties is possible. Prior to QI entering into a license or
development agreement with any third party relating to any future development,
product or project, initiated by QI, QI shall notify ATI of the potential of
such a transaction at least thirty (30) days prior to QI entering into such an
agreement ("Negotiation Period"). During such Negotiation Period, QI agrees to
negotiate in good faith with ATI an agreement or license relating to such future
development, product or project. QI's obligation under this section shall
terminate upon the termination of this Agreement. Notwithstanding the foregoing,
QI shall have no obligation to advise ATI of any
7
<PAGE>
future development projects with third parties in situations where such project
discussions were not initiated by QI. The parties acknowledge that QI currently
has existing business relationships and projects either underway or under
consideration with various third parties. The parties further acknowledge that
much of the information concerning such existing business relationships and
projects involve confidential information. Accordingly, notwithstanding the
foregoing, QI shall have no obligation to advise ATI at any time about the
existence of, or any other information relating in any way to, any of QI's
existing business relationships with third parties or about projects underway
with, under consideration with such third parties.
7. Financial Terms.
---------------
7.1. Royalty Payments by ATI. During the term of this Agreement and at
-----------------------
all times ATI shall pay QI royalties based on ATI's sale of each
copy of Shippable DVD Software, or any derivative work of Shippable
DVD Software and Hardware DVD, within thirty (30) days after the end
of each calendar quarter (ending on March 31, June 30, September 30
and December 3 1), for the sale of Hardware DVD, Shippable DVD
Software, or such derivative work, during such quarter. The royalty
rate shall be as follows:
Cumulative Volume Royalty Per Copy
----------------- ----------------
* *
Notwithstanding the foregoing, upon both parties agreement, in the event that an
ATI customer demands royalties of less than * (in the case where ATI is
paying to QI royalties of * ) or royalties of less than * (in the case
where ATI is paying to QI royalties of * ), both parties may agree to split
the royalty payment by the customer equally between ATI and QI.
ATI will be responsible for Dolby Royalties or any other royalties arising out
of the DVD or CSS forum payable on Shippable DVD Software sold by ATI.
7.2. During the term of this Agreement and at all times thereafter, ATI
shall pay QI royalties based on ATI's sale of each copy of Video
Encoder Software, or any derivative work of Video Encoder Software,
within thirty (30) days after the end of each calendar quarter
(ending on March 31, June 30, September 30 and December 31), for
sale of Video Encoder Software, or such derivative work, during such
quarter. The royalty rate shall be as follows:
Cumulative Volume Royalty Per Unit
----------------- ----------------
* *
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
8
<PAGE>
* *
7.3. Minimum Prepaid Royalties. At the end of each calendar quarter
-------------------------
during the first year of royalty payments, commencing on the date
that Shippable Software DVD is provided to ATI by QI, ATI shall pay
to QI, a minimum prepaid royalty payment of * . At the end of each
three (3) month period during the second year of royalty payments,
ATI shall pay to Quadrant, a minimum prepaid royalty of * . These
royalties shall be credited towards the royalties earned during such
calendar quarter. In the event that the royalties for any calendar
quarter plus credits from previous quarters exceed the actual
royalties earned during such calendar quarter, such excess royalties
will be credited towards future royalties in the following calendar
quarters. After the conclusion of the eighth quarter, ATI will not
be required to make minimal royalty payments.
7.4. ATI may apply * of the minimum prepaid royalty due in each of the
first four (4) quarters of the first year of royalty payments to
purchase further equity in Quadrant in the form of convertible
preferred stock and warrants such further equity shall also
constitute prepaid royalties by ATI and shall reduce ATI's minimum
prepaid royalty accordingly. Provided that ATI is still obligated to
pay a minimum prepaid royalty, ATI may further apply * of the
minimum prepaid royalty due * after ATI is first provided with a
Shippable Software DVD to purchase further equity in Quadrant in the
form of convertible preferred stock and warrants.
7.5 Favoured Pricing for ATI and ATI Customers. Under the terms of this
------------------------------------------
Agreement, QI agrees that ATI and ATI customers shall be provided
with a no less favourable royalty rate than QI may grant or has
granted to any other entity. In the event that QI has licensed any
version of its QI Software DVD at a more favorable royalty rate
and/or on terms more favorable than those described herein, ATI
shall be automatically entitled to the same royalty rate and/or
terms granted by QI to the other entity.
7.6 The parties acknowledge that there may arise situations where an OEM
of ATI would like to incorporate QI's Accelerated Software DVD that
is then currently subject to the ATI's Exclusivity Period in a
product line that does not include ATI graphics technology. In such
situations, ATI may, within its discretion, waive its right to
exclusivity during the relevant Exclusivity Period and permit QI to
sell that Version of QI's Accelerated Software DVD to such OEM, and
in such event, QI will pay to ATI a reverse royalty,during the
Exclusivity Period, equal to the lesser of: (a) * per copy of the
Accelerated Software DVD incorporating such Version sold to the OEM
during such Exclusivity Period, or (b) * of the license fees
received by QI from the OEM attributable to QI's Accelerated
Software DVD incorporating such Version that is sold during such
Exclusivity Period. QI shall make such reverse royalty
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
9
<PAGE>
payments to ATI on a quarterly basis, with respect to applicable
sales during the preceding calendar quarter.
7.7 Records and Reports.
-------------------
ATI shall maintain complete, clear and accurate records of the number of copies
of Shippable Software DVD and QI Software DVD sold or otherwise disposed of by
either ATI or QI. On a calendar quarterly basis, ATI shall provide QI with a
written summary, broken out by month, of the number of copies sold in such
calendar quarter.
QI shall maintain complete, clear and accurate record(s) of the number of copies
of Accelerated Software DVD sold to OEM(s) pursuant to Section 7.7. On a
calendar quarterly basis, QI shall provide ATI with a written summary, broken
out by month, of the number of copies sold in such calendar quarter, but only if
there were applicable copies sold to OEM(s) during the relevant calendar
quarter.
7.8 Audit. Each party shall have the right during the term of this
-----
Agreement and for one (1) year thereafter, and QI shall have the
right after termination of this Agreement for so long as ATI is
obligated to make royalty payments to QI hereunder, to have an
inspection and audit of the records maintained by the other party
conducted by a mutually agreeable third party auditor, which
inspection and audit shall be conducted during regular business
hours at the other party's offices, upon seven (7) days notice and
in such a manner as not to interfere with normal business
activities. This audit right shall be limited to twice per year
unless a discrepancy is shown. The party requesting the audit shall
be responsible for the fees and costs of such audit. In the event an
audit reveals an underpayment of fees and/or royalties of more than
five percent (5%), the delinquent party shall promptly pay the other
Party the amount of any such underpayment and the costs of such
audit. Such audit will be conducted under a confidentiality
agreement wherein only the amount of any overpayment or underpayment
may be disclosed.
7.9 U.S. Currency. All payments specified herein are in U.S. dollars
-------------
and all payments made hereunder will be made in U.S. dollars.
8. Warranties.
----------
8.1 QI represents and warrants that it has no actual knowledge that QI's
Software DVD infringes any valid Intellectual Property Right of any
third party.
8.2 QI represents and warrants that the Shippable Software DVD shall be
free of any known viruses.
8.3 QI represents and warrants that QI either owns the copyright in the
Shippable Software DVD or has been licensed to grant the rights and
licenses granted hereunder to ATI.
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8.4 QI represents and warrants that the Shippable Software DVD shall be
Year 2000 compliant in that it shall provide and/or receive data
within and between the 20/th/ and 21/st/ centuries, provided that
all hardware, software and firmware used with the Shippable Software
DVD properly exchanges accurate date data with it. QI shall be
liable for direct damages in the event of a breach of this express
warranty.
8.5 QI represents and warrants that QI is a CSS Licensee and that the
Shippable Software DVD, when provided to ATI, shall be CSS
Compliant.
8.6 QI represents and warrants that QI is an AC-3 Licensee and the
Shippable Software DVD, when provided to ATI, meets all the
technical, marketing and other requirements imposed by Dolby on its
AC-3 Licensees.
8.7 ATI and QI represent and warrant that they are a CSS Licensee and
will at all times perform within the scope of its duties under the
CSS License agreement.
8.8 ATI represents and warrants that there will be no unauthorized
disclosure or use of any Source Code by ATI, or any employee or
contractor of ATI, and that no unauthorized party shall have access
to copies of any Source Code in ATI's possession or control.
8.9 QI represents and warrants that it does not have any agreements with
Viona to prevent the disclosure of Source Code of the QI Software
DVD to ATI and further that QI has the right to grant licenses under
Viona Intellectual Property Rights subsisting in the QI Software DVD
to ATI under the terms of this Agreement.
9. Confidentiality.
---------------
"Confidential Information" means any information provided to either party by the
other party in connection with this Agreement, including this Agreement, which
is confidential and proprietary to the disclosing party and conspicuously marked
as confidential at the time provided by the disclosing party. Any information
provided orally by a party is presumed to be non-confidential, unless designated
as confidential at the time of disclosure and summarized in a written notice
within fifteen (15) calendar days of such oral disclosure. All Source Code is
hereby deemed Confidential Information. Each party shall hold in confidence all
Confidential information during the term of this Agreement and at all times
thereafter. Each party agrees to take precautions to prevent any unauthorized
disclosure or use of Confidential Information, and such precautions will be
consistent with the precautions used to protect such party's own confidential
information, but in no event less than reasonable care. The obligations of the
parties hereunder shall not apply to any materials or information which a party
can demonstrate, through documented evidence (a) is now, or hereafter becomes,
through no act or failure to act on the part of the receiving party, generally
known or available; (b) is known by the receiving party at the time of receiving
such information as evidenced by its records; (c) is hereafter furnished to the
receiving party by a third party, as a matter of right and without restriction
on disclosure; (d) is independently developed by the receiving party without any
breach of this Agreement; or (e) is the subject of a written permission to
disclose provided by the disclosing party. Notwithstanding any other provision
of this Agreement, disclosure of Confidential Information shall not be
11
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precluded if such disclosure: (a) is in response to a valid order of a court or
other governmental body of the United States or Canada or any political
subdivision thereof; provided, however, that the responding party shall first
have given notice to the other party hereto so that such other party may attempt
to prevent such disclosure and if disclosed, the responding party shall have
made a reasonable effort to obtain a protective order requiring that the
Confidential Information so disclosed be used only for which the order was
issued and be treated as confidential and under seal; (b) is otherwise required
by law; or (c) is otherwise necessary to establish rights or enforce obligations
under this Agreement, but only to the extent that any such disclosure is
reasonably necessary.
10. Excluded Damages.
----------------
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL,
EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER ARISING OUT OF CONTRACT,
TORT, STRICT LIABILITY OR OTHERWISE, RESULTING FROM OR RELATED TO THIS AGREEMENT
(WHETHER OR NOT SUCH PARTY KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF ANY
SUCH DAMAGES). THIS SECTION WILL APPLY NOTWITHSTANDING ANY OTHER PROVISIONS OF
THIS AGREEMENT.
11. Indemnification.
---------------
11.1 Each party agrees to defend, indemnify and hold harmless the other
party and its officers, directors, employees, agents and contractors
("Indemnitees") from and against any and all claims, actions,
liabilities, obligations, damages, losses, demands, recoveries,
deficiencies, costs or expenses, including without limitation,
reasonable attorneys fees and expenses, which an Indemnitee may
suffer or incur connected with, resulting from or arising out of
such party's breach of its representations, warranties and/or
covenants made in this Agreement.
11.2 QI agrees to defend, indemnify and hold harmless ATI from and
against any and all claims, actions, liabilities, obligations,
damages, losses, demands, recoveries, deficiencies, costs or
expenses, including without limitation, reasonable attorneys fees
and expenses, which ATI may suffer or incur connected with,
resulting from or arising out of the infringement or
misappropriation of a third party Intellectual Property Right by the
materials supplied by QI, including the Shippable DVD Software. The
foregoing indemnity will not apply to any infringement or
misappropriation claim arising from (a) any modifications to the
Shippable DVD Software wherein the claim arises as a result of such
modification and the modification was made by parties other than QI,
or (b) any combination of any Shippable DVD Software with other
products or components where there would be no infringement absent
such use with such other products or components.
11.3 The indemnification provisions set forth herein are predicated on
the indemnitee giving prompt written notice of any claim for which
indemnification is required, tender the defense of any such claim to
the indemnifying party, providing full cooperation for such defense
at the indemnifying party's expense, and not settling
12
<PAGE>
without the indemnifying party's prior written approval, not to be
unreasonably withheld. The indemnitee may participate in any such
defense or settlement with counsel of its own choosing at its own
expense.
12. Trademarks and Logos.
--------------------
QI agrees that the Shippable Software DVD to be marketed and sold by ATI shall
be sold and marketed under ATI Trademarks. QI agrees to prominently mark, with
ATI Trademarks, as identified and approved by ATI, the Shippable Software DVD,
Documentation and packaging to be sold and distributed by ATI. QI acknowledges
and agrees that QI trademarks and brand name will not be used in association
with the above product. ATI agrees not to remove any copyright notices, which
will acknowledge the copyrights of both parties, from any version of the
Shippable Software DVD.
QI recognizes ATI's ownership and title to the ATI Trademarks and the goodwill
attaching thereto. QI agrees not to contest or take any action to contest the
ATI Trademarks, or to use, employ or attempt to register any trademark which is
confusingly similar to the ATI Trademarks.
14. Co-Marketing.
------------
The parties agree to provide reasonable assistance to each other, within each
party's sole discretion, in the promotion, marketing and advertising of the
other parties DVD products.
15. Term and Termination.
--------------------
15.1 Term. Unless otherwise terminated under this Section, this
----
Agreement shall commence on the Effective Date and shall continue
for an initial term of two (2) years. This Agreement will be
automatically extended for one (1) year terms, unless written notice
of its intention of non-renewal from one party is received by the
other no later than (60) days prior to the end of the initial or
extended term.
15.2 Termination of Agreement. This Agreement may be terminated at any
------------------------
time by a party: (a) for material breach of this Agreement by the
other party, if such breaching party does not cure such breach
within thirty (30) days after receiving written notice thereof; and
(b) for a repeated breach of this Agreement by the other party, if
such breaching party does not cease committing such repeated
breaches within thirty (30) days after receiving written notice
thereof.
15.3 Survival. The rights and obligations contained in the following
--------
sections shall survive any termination or expiration of this
Agreement: Section 3, Section 4, Section 8.7, 8.8, Section 9,
Section 10, Section 11, Section 12, and Section 16. 1, Section 16.2,
Section 16.3, Section 16.4, and Section 16.8. In the event the
Agreement is terminated, licenses granted to ATI under this
Agreement shall survive along with ATI's obligations as set out in
Section 7.1, 7.2, 7.3, 7.8 and 7.9. ATI's obligations under Sections
2.4 and 4.5 shall also survive any termination of this Agreement.
13
<PAGE>
15.4 Upon termination of this Agreement for any reason, each party shall
have all rights and remedies available to it in law or in equity
with respect to the other party.
16. General Provisions
------------------
16.1 Export Control. Both parties agree to comply strictly and fully
--------------
with all export control laws and regulations of both the United
States and Canada.
16.2 Public Announcements. No press release or public notice relating to
--------------------
this Agreement may be made by either party without receiving the
other party's prior written consent. If requested by one party, the
other party shall promptly supply the other party with copies of all
public statements and of all publicity and promotional material
relating to this Agreement and the sale and promotion of QI's
Software DVD.
16.3 Assignment. Neither party may assign this Agreement, or any of its
----------
rights or obligations under this Agreement to any third party
without the other party's written consent. Notwithstanding the
foregoing, either party shall have the right to assign or transfer
this Agreement in the case of a merger, acquisition or sale of
substantially all of such party's assets.
16.4 Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the laws of the Commonwealth of Pennsylvania,
excluding its choice of law rules. The parties hereby agree that any
dispute regarding the interpretation or validity of, or otherwise
arising out of, this Agreement shall be subject to the exclusive
jurisdiction of the Pennsylvania state and Federal courts if legal
action is commenced by ATI, and in the Ontario Provincial Courts of
Canada or Canadian Federal Court if legal action is commenced by QI,
and the parties agree to submit to the personal and exclusive
jurisdiction and venue of these courts. The parties hereby expressly
waive any right to a jury trial and agree that any proceeding
hereunder shall be tried by a judge without a jury. The parties
exclude the application of the United Nations Convention on
Contracts for the International Sale of Goods, even if otherwise
applicable.
16.5 Headings. The paragraph headings appearing in this Agreement are
--------
inserted only as a matter of convenience and in no way define,
limit, construe or describe the scope or extent of such paragraph,
or in any way affect such agreements.
16.6 Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which will be considered an original,
but all of which together will constitute one and the same
instrument.
16.7 Notices. Any notice required under this Agreement shall be given in
-------
writing and shall be deemed effective upon delivery to the party to
whom addressed by (a) express courier, upon written verification of
actual receipt, (b) facsimile, upon confirmation of receipt
generated by the sending device, or (c) five days after
14
<PAGE>
sending, via certified mail, return receipt requested. All notices
shall be sent to the applicable address on the cover page hereof or
to such other address as the parties may designate in writing, with
a copy to the legal department of such party.
16.9 Amendments. Any amendments to this Agreement must be in writing and
----------
executed by the authorized representatives of the parties.
16.10 Severability. The illegality or unenforceability of the whole or
------------
any part of the provisions of this Agreement will not affect the
continued operation of the remaining provisions of this Agreement.
16.11 Waiver. The failure of either party at any time to insist upon
------
strict performance of any of the terms and conditions contained in
this Agreement will not be deemed a waiver of its right at any time
thereafter to insist upon strict performance.
16.12 Relationship of the Parties. Nothing in this Agreement shall
---------------------------
constitute, nor shall any party represent that there is any
relationship of employer and employee, principal and agent or
partnership between the parties as a result of this Agreement.
16.13 Force Majeure. Neither party will be responsible for delays or
-------------
failures in performance resulting from acts beyond the control of
such party, including, without limitation, acts of God, riots, acts
of war, epidemics, fire, earthquakes or other natural disasters.
16.14 Entire Agreement. This Agreement and the exhibits hereto are the
----------------
complete agreement of the parties relating to the subject matter
hereof. This Agreement supersedes and governs any other prior or
collateral agreements or understandings, whether written or oral
with respect to the subject matter hereof
16.15 Escrow. Upon ATI's request, QI shall place the Source Code of the
------
QI Software DVD in escrow. The choice of the escrow agent and the
instructions given will be mutually agreed upon by both parties.
IN WITNESS WHEREOF, the authorized representatives of the parties have executed
this Agreement as of the date last signed below.
ATI QI
ATI Technologies Inc. Quadrant International, Inc.
By: /s/ Lee K. Lau By: /s/ Francis E. Wilde
Print Name: Lee K. Lau Print Name: Francis E. Wilde
Title: Vice President Title: President
15
<PAGE>
Date: March 18, 1998 Date: March 18, 1998
16
<PAGE>
EXHIBIT 10.8
STI5505 DEVELOPMENT CONTRACT
----------------------------
This Contract is entered on February 1, 1999 (the "Effective Date")
----------------
By
ST Microelectronics SA, a company duly organized and existing under the laws of
France having its registered office at 7, avenue Gallieni, 94253 Gentilly Cedex
(France) represented herein by Philippe Lambinet who is authorized to conclude
this Contract.
Hereinafter referred to as "ST"
And
QUADRANT INTERNATIONAL, a company duly organized and existing under the laws of
the Commonwealth of Pennsylvania, USA having its registered office at 1 Great
Valley Parkway, Malvern, PA 19355 USA, represented herein by Frank Wilde who is
authorized to conclude this Contract.
Hereinafter referred to as "QI"
PREAMBLE:
WHEREAS, QI develops software products and has expertise to develop software for
its clients. ST wishes to engage QI to perform certain development services and
QI wishes to perform such design development services in accordance with the
provisions of this Contract.
NOW, THEREFORE, intending to be legally bound, and in consideration of the
mutual promises set forth in this Contract, the Parties agree as follows:
SECTION 1: DEFINITIONS
- ----------------------
For the purpose of this Contract, the following words and phrases shall have the
following meanings:
1.1 "Affiliate" means an entity controlling, controlled by, or under
---------
common control with ST. Control exists when an entity owns or controls more than
fifty percent (50%) of the outstanding shares or securities representing the
right to vote for the election of directors or other managing authority or
another entity.
1.2 "Contract" means this agreement and all the appendixes annexed to this
--------
Contract as he same may be amended from time to time in accordance with the
provisions hereof. "Hereof," "hereto" and "hereunder" and similar expressions
mean and refer to this Contract and not to any particular section or subsection
(either referred to herein as "Section").
1.3 "Customers" means any Person other than ST or an ST Affiliate to which
---------
ST or an ST Affiliate sells a Product.
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
1.4 "Deliverables" shall mean the specific materials, devices, Software,
------------
Platform and/or other deliverables described as such in the Statement of Work.
1.5 "Derivative" means (a) for copyrightable or copyrighted material
----------
(including materials subject to mask work rights), a work which is based upon
one or more preexisting works (or portions of preexisting works), such as a
revision, modification, translation, abridgment, condensation, expansion,
collection, compilation, or any other form in which such preexisting works may
be recast, transformed, or adapted; (b) for patentable or patented materials,
any adaptation, addition, improvement, or combination based on a preexisting
work; and (c) for material subject to trade secret protection, any new material,
information, or data relating to and derived from such existing trade secret
material, including new material which may be subject to protection under
copyright law, patent law, trade secret law, or other intellectual property
laws.
1.6 "Documentation" shall mean user manuals and other written materials
-------------
that relate to the Deliverables. Documentation shall include any maintenance,
modifications, enhancements, and updates to such Documentation.
1.7 "Intellectual Property Rights" means (a) all Patent Rights; (b) all
----------------------------
trade secret rights arising under the laws of any jurisdiction; (c) all United
States and foreign semiconductor mask work rights and registrations for such
rights; and (d) all copyright rights and all other literary property and author
rights, whether or not copyrightable, and all copyrights and copyrighted
interests, including renewals thereof, but will not include any rights in any
trademarks, trade names, service marks, logos, trade dress and/or the goodwill
associated therewith. "Patent Rights" means all United States and foreign
letters patent and applications for letters patent, industrial models,
industrial decisions, utility models, certificates of invention, and other
indicia of invention ownership, including any such rights granted upon any
reissue, division, continuation or continuation-in-part applications now or
hereafter filed.
1.8 "Object Code" means the machine readable form of computer programming
-----------
code as opposed to the human readable form of computer programming code.
1.9 "Parties" shall mean ST and QI.
-------
1.10 "Party" shall mean one of the Parties.
-----
1.11 "Person" means any individual, sole proprietorship, joint venture,
------
partnership, corporation, association, trust estate, governmental agency,
regulatory agency, regulatory authority, or any other entity.
1.12 "Platform" shall mean the system to be developed by QI and delivered
--------
to ST in accordance with the Statement of Work.
1.13 "Product" shall mean any STi5505 or STi5508 that incorporates any QI
-------
Deliverable.
1.14 "Project" shall mean the realization of the Services and the delivery
-------
of the same and its acceptance by ST.
2
<PAGE>
1.15 "Proprietary Items" means all of the following, whether provided to
-----------------
ST orally, in written form or otherwise and provided that if contained in
written or tangible form is marked as "Internal Use Only," "Proprietary,"
"Confidential," or similar words; and if orally disclosed a reasonable summary
of same is reduced to a writing marked as "Proprietary," "Confidential," or
similar words; the writing is delivered to ST within thirty (30) days of the
first disclosure to ST: (a) all Software, (b) any information, technical data,
trade secrets, or know-how, including, but not limited to, that which relates to
QI's research. product plans, products, services, customers, markets, software,
hardware, developments, inventions, discoveries, procedures, methods,
experimental techniques, processes, designs, drawings, blueprints,
specifications, patent applications, engineering, hardware and software
configuration information, processes, methods, materials, sources of supply and
fees; (c) all information relating to QI's past, present and future marketing
and business activities; (d) all information regarding QI's prior, current and
prospective customers and suppliers, including but not limited to, each
customer's or supplier's name, address and other identifying information, all
information regarding the products or services sold to or purchased from each
such customer or supplier, and all information regarding the business
relationship and business transactions between QI and each such customer and
supplier; and (e) all information that is provided by or on behalf of QI to ST
which is specified as being confidential. Proprietary Items expressly includes
any and all information derived from the foregoing Proprietary Items and all
compilations and copies thereof. Notwithstanding the foregoing, Proprietary
Items will not include any information (i) which was known to ST prior to its
disclosure by QI (as evidenced by contemporaneous written records maintained in
the ordinary course of business) and not the subject of any other
confidentiality obligation owed to QI, (ii) which is currently or subsequently
becomes part of the public domain through no fault of ST, (iii) which is
disclosed to ST by any Person who is not bound by an obligation to maintain such
information in confidence, or (iv) which was independently developed or created
by ST without reference to any Proprietary Items (as evidenced by
contemporaneous written records maintained in the ordinary course of business).
1.16 "QI Deliverables" shall mean the specific Deliverables identified as
---------------
QI Deliverables: in the Statement of Work, (ii) in an executed Change Request
under Section 2.5, or (iii) as part of a Customer Customization agreed to under
Section 6.
1.17 "Services" shall mean the services described in the Statement of
--------
Work.
1.18 "Software" shall mean the program in Object Code and the
--------
Documentation to be developed by QI in accordance with the Statement of Work.
1.19 "Statement of Work" is set out in Appendix 1 of this Contract.
-----------------
1.20 "ST Deliverables" shall mean the specific Deliverables identified as
---------------
ST Deliverables in the Statement of Work.
1.21 "STi5508 Port Payment" shall mean the actual costs incurred by QI to
--------------------
port the Software to the STi5508.
1.22 "Unit" shall mean a single Product.
----
3
<PAGE>
1.23 As used herein, the terms "sale," "sell," or "sold" (and other
conjugated forms of the verb "to sell") in the context of a copy of any software
product or the context of the technology in the Product means the sale, or other
disposition, of a license for a copy of such software or technology.
SECTION 2: WORK TO BE PERFORMED
- --------------------------------
2.1 QI undertakes to perform the Services in accordance with the terms
and conditions of this Contract. QI shall use its commercially reasonable
efforts to meet the schedules and time of realization of the Services as set
forth in the Statement of Work.
2.2 QI will keep ST regularly informed of the development of the
Services. The Parties shall conduct periodic progress reviews until ST's final
acceptance of the QI Deliverables. Such progress reviews shall be conducted as
requested by ST and may be in the form of conference calls and/or meetings
between ST and QI.
2.3 Both Parties agree to designate an Administrative Manager, and a
Technical Manager from their respective companies. These individuals will use
reasonable efforts in coordinating the continuing development of objectives,
related scheduling and resource allocation in respect of the provision of the
Services.
(a) Administrative Manager at ST is: Christophe Hubert located at ST
Microelectronics, Avenue des Martyrs, B.P. 217, F-38019 Grenoble, France Tel#
(33)-4- 76-58-55-45 and Fax# (33)-4-76-58-42-11.
(b) Technical Manager at ST is: Michel Aubert located at ST
Microelectronics, Avenue des Martyrs, B.P. 217, F-38019 Grenoble, France Tel#
(33)-4- 76-58-43-59 and Fax# (33)-4-76-58-41-23.
(c) Administrative Manager at QI is: Sharon Taylor located at
Quadrant International, 1 Great Valley Parkway, Malvern, PA 19355, U.S.A. Tel#
(1)-610-251-9999 and Fax# (1)-610-722-9747.
(d) Technical Manager at QI is: Hendrik Horak located at Viona
Development, Karlstr. 27, D-76133 Karlsruhe, Germany Tel# (49)-721-913-440 and
Fax# (49)-721-913-4499.
Either Party may change its respective Administrative Manager or Technical
Manager, from time to time, upon notice to the other Party.
2.4 ST may withhold acceptance of any QI Deliverables or part thereof if
it reasonably concludes that the QI Deliverable is not in material compliance
with the specifications for such QI Deliverable set forth in the Acceptance
Criteria specified in the Statement of Work and/or the specifications for such
QI Deliverable prepared by QI and which specifications were accepted by ST under
the Statement of Work or otherwise. ST may reject any QI Deliverable or part
thereof, within (20) days after QI's delivery to ST, in accordance with the
foregoing sentence, by giving written notice to QI of such rejection and setting
forth in reasonable detail the reasons therefor, including a description of how
such QI Deliverable is not
4
<PAGE>
in material compliance with the relevant specifications. Failure of ST to so
notify QI within the said period shall be deemed as acceptance. Upon delivery of
a rejection notice, QI shall commence work to correct the failures specified in
such notice and shall use its good faith reasonable efforts to correct such
failures in a timely fashion so that the QI Deliverable meets the relevant
specifications. When QI believes it has made the necessary corrections QI will
again deliver the QI Deliverable to ST and the acceptance/rejection/correction
provisions above shall be reapplied until the QI Deliverable is accepted;
provided, however, that upon the third or any subsequent rejection, or if the
corrections are not made within sixty (60) days of initial rejection, ST may
terminate this Contract by delivering written notice to QI. Notwithstanding the
foregoing, acceptance of a QI Deliverable shall be deemed to have occurred if ST
sells, ships, bills, and/or is paid for a product incorporating such QI
Deliverable.
2.5 Each Party may request a change to the Project, and for such purpose
shall submit in writing a "Change Request" to the other Party's Administrative
and Technical Managers describing in detail the requested change and the reason
for such request. Within fifteen (15) days (or such longer period as agreed by
the Parties) after the receipt of such Change Request, the Parties shall discuss
the necessity and/or desirability of the Change Request and the resulting,
adjustments to the Statement of Work. When both Parties' Technical Managers
have executed the Change Request describing the Change, its implementation and
the agreed upon adjustments, QI shall commence performance in accordance with
such Change Request. Each Change Request executed by the Parties' Technical
Manager as described above shall be incorporated into and constitute an
amendment to this Contract.
SECTION 3: DELIVERY
- -------------------
Once the QI Deliverables have been accepted by ST, delivery of the QI
Deliverables shall be deemed completed.
SECTION 4: LICENSE GRANTS
- -------------------------
4.1 QI hereby grants ST a perpetual (except as provided in Section 11.3),
worldwide, non-exclusive rights to: use the QI Deliverables, in Object Code form
only, in connection with the manufacture, use, offering for sale, sale and
distribution of Products to Customers, and to make, have made, use, offer for
sale, sell, and otherwise distribute the Products to Customers which incorporate
the QI Deliverables in Object Code form. QI may, solely within QI's discretion
and on a case-by-case basis, make available to Customers (but not to ST) certain
portions of the Source Code for the QI Deliverables, on terms and conditions
that are satisfactory to QI.
4.2 ST shall have the right to extend the license granted in this Section
4 to ST's Affiliates. Any such Affiliates shall be bound by the same terms and
conditions in this Contract and ST shall remain responsible for the payment of
any and all royalties relating to such Affiliates.
4.3 ST grants to QI a non-exclusive, worldwide, revocable, non-
transferable, non-sublicensable, royalty-free license to use the technical
information, including the Intellectual
5
<PAGE>
Property Rights therein, delivered by ST to enable QI to perform its obligations
under the provisions of Section 2 above.
SECTION 5: CONSIDERATION AND PAYMENT
- ------------------------------------
5.1 In full consideration for the Services (including the services set
forth in Section 10 below) undertaken pursuant to this Contract and the rights
granted to ST hereunder, ST shall pay to QI:
(a) * as a non-refundable NRE, representing payment for certain of the
Services performed by QI on behalf of ST prior to the date of this Contract. QI
hereby acknowledges its receipt of the payment from ST under this Section
5.1(a); and
(b) * as a non-refundable NRE upon QI's delivery to ST and ST's
acceptance of a demo of the Platform, in accordance with Section 4.2(iii) of the
Statement of Work. Such payment shall be made within sixty (60) days from the
date of receipt by ST of the relevant invoice; and
(c) The STi5508 Port Payment as a non-refundable NRE upon QI's
delivery to ST and ST's acceptance of the port of the Software to the STi5508.
It is understood that the port will include support of new functionalities of
the STi5508 versus those in the STi5505. Such STi5508 Port Payment, * shall be
made within sixty (60) days from the date of receipt by ST of the relevant
invoice; and
(d) The greater of: (i) * of any actual Customer Customizations
Payment to ST (refer to the Estimated Customization Fee Schedule attached as
Appendix 3 for estimated costs) or (ii) * as a non-refundable NRE upon QI's
delivery to ST and ST's acceptance of Customer Customizations, unless otherwise
agreed and superseded by an addendum. Such payment shall be made within sixty
(60) days from the date of receipt by ST of the relevant invoice; and
(e) During the term of this Contract, and at all times thereafter,
royalties based on ST's sale of each Unit. The royalty rate, subject to the
exceptions in the Appendix 2 and Appendix 3 hereto, shall be as follows:
Cumulative Volume Royalty Per Unit
----------------- ----------------
* *
5.2 Any customization work done by QI on the behalf of ST and/or a
Customer under this Contract will be paid in the form of a non-refundable NRE,
unless otherwise agreed and superseded by an addendum.
5.3 Royalty Payments by ST. During the term of this Contract and at all
----------------------
times thereafter, ST shall pay QI royalties under Section 5.1(e), within sixty
(60) days after the end of each calendar quarter (ending on March 31, June 30,
September 30 and December 31), for sales of Products during such quarter. All
royalties due QI hereunder shall accrue when Products are
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
6
<PAGE>
sold, shipped, billed and/or paid for, whichever occurs first. For the avoidance
of doubt, no royalty will be due to QI when the STi5505/STi5508 is sold without
any QI Deliverables embedded in the STi5505/STi5508.
5.4 Reports. In addition to the quarterly royalty payment described in
-------
Sections 5.1(e) and 5.3, ST shall also provide QI with a written summary of Unit
sales during, such calendar quarter.
5.5 Taxes, Duties, Levies, VAT.
--------------------------
(a) ST shall pay all taxes, duties, levies, handling charges and
other fees (other than QI's direct net income taxes) imposed or levied against
or incurred by either ST or QI under any law now or hereafter in effect, levied
or based upon the license, delivery, shipment, import, export, manufacture or
ST's possession or use of the software licensed hereunder or upon the grant of
the licenses contemplated by this Contract or the exercise thereof or based upon
or measured by the royalty or payment thereof or any part thereof. It is
understood and agreed that if ST is required by any governmental authority to
withhold any portion of the royalty prescribed herein and pay over such portion
to such governmental authority, then such monies retained by ST and paid over to
the governmental authority shall be deemed to be a payment by ST to QI in
satisfaction and to the extent, of that portion of ST's obligation under this
Contract, provided, however, that ST promptly furnish QI with official
government receipts as evidence of each such payment.
(b) If any Governmental authority requires that value added tax
("VAT") is to be levied on payments hereunder, ST will be solely responsible for
payment of said VAT levies.
5.6 Audit Rights and Adjustments.
----------------------------
(a) ST shall keep its books and records showing the manufacture, sale
or other disposition of all Products, and otherwise concerning ST's rights and
obligations under this Contract, in accordance with generally accepted
accounting practices. The books of account and other records shall be kept in
sufficient detail to enable the royalty payments payable hereunder to be
properly ascertained.
(b) QI shall have the right for representatives of a firm of
independent accountants, who shall have signed an appropriate nondisclosure
agreement, to which ST shall not unreasonably object ("Auditors"), to make an
examination and audit, by prior appointment agreed between the Parties, such
agreement not to be unreasonably withheld, during normal business hours, not
more frequently than once annually during the time ST is required to make
royalty payments to QI hereunder and for one year thereafter, of all records and
accounts as may under recognized accounting practices contain information
bearing upon the QI sales revenue and the number of Products sold by ST under
this Contract. The Auditors will report to QI only upon whether the royalties
paid to QI by ST were or were not correct, and if incorrect, what are the
correct amounts for the royalties, and the amount of time of such delinquency so
that interest due thereon may be calculated. ST shall be supplied with a copy
of or sufficient extracts from any report prepared by the Auditors. The
Auditors' findings shall (in the absence of clerical or manifest error) be final
and binding on the Parties. If QI has a good faith belief that its Auditors
7
<PAGE>
have made a clerical or manifest error, then QI shall have the right, within
thirty (30) days after the first audit, to have a second audit performed, on the
same terms and conditions set forth above, for the purpose of verifying the
accuracy of the first audit. Such audit(s) shall be at QI's expense unless it
reveals an underpayment of royalties of five percent (5%) or more in which case
ST shall reimburse QI for the costs of such audit; provided, however, that ST
shall not be responsible in any event for bearing the cost of a second audit
that may be performed to verify the accuracy of the first audit. ST will make
prompt adjustment to compensate for any errors or omissions disclosed by any
such examination and certification of ST's records, or which otherwise come to
the attention of ST. ST shall pay interest on any such payment adjustments in
accordance with Section 5.7.
5.7 Interest. Any payment which is delayed for more than thirty (30) days
--------
beyond the due date shall be subject to an interest and service charge of one
percent (1%) per month, compounded monthly from the date such payment first
became due until paid, to the extent allowed by law.
5.8 Payment Method. AU payments made hereunder shall be made in United
--------------
States currency, by wire transfer, check, or other reasonable payment means and
to such United States bank account(s) indicated by QI in writing from time to
time.
5.9 Blocked Funds. In the event that ST shall be prohibited or restricted
-------------
from making payment of any monies at the time when the same are due and payable
to QI hereunder by reason of the laws or currency regulations, ST shall promptly
so advise QI in writing. ST shall, upon QI's request in writing: (a) deposit
any such blocked funds to the credit of QI in a bank or banks or other
depository designated in writing by QI or (b) pay such funds to such entities as
QI may designate in writing.
SECTION 6: CUSTOMIZATIONS
- -------------------------
If a Customer or prospective Customer requires that the Software or
other portion of the Platform be customized to meet such Customer's or
prospective Customer's requirements ("Customer Customizations"), then QI, ST,
and the Customer or prospective Customer will meet and confer in good faith to
discuss the matter, including the payment for such Customer Customizations
("Customer Customizations Payment"). Unless and until QI, ST, and the Customer
or prospective Customer reach an appropriate agreement concerning the matter, QI
shall have no obligation to undertake any customization services on behalf of a
Customer or prospective Customer.
SECTION 7: TRAVEL REIMBURSEMENTS
- --------------------------------
7.1 ST shall reimburse QI for the cost of one (1) trip to Grenoble for the
training of ST engineers; provided, however, that such reimbursement shall not
exceed five thousand U.S. dollars (US$5,000).
7.2 ST shall reimburse QI for the cost of two (2) sales trips to Asia:
provided, however, that such reimbursement shall not exceed five thousand U.S.
dollars (US$5,000) per trip.
8
<PAGE>
SECTION 8: OWNERSHIP
- --------------------
Intellectual Property Rights arising, developed or delivered hereunder
shall be owned as follows: Intellectual Property Rights originated, discovered
or developed by ST. shall be owned by ST, and Intellectual Property Rights
originated, discovered or developed by QI shall be owned by QI Intellectual
Property Rights originated, discovered or developed jointly by both Parties
("Jointly Owned Intellectual Property") shall be jointly owned and each Party
shall have the unrestricted right under Jointly Owned Intellectual Property to
make, use, sub-license and/or sell any product anywhere in the world, in Object
Code form only, without any restriction by the other Party. Both Parties agree
to execute without further consideration any and all further documents or
assurances as may be necessary to effect the above or to assist one Party in
protecting (including the filing of patents) the Jointly Owned Intellectual
Property. With respect to Intellectual Property Rights that are subject to
copyright protection, such Intellectual Property Rights will only be considered
"Jointly Owned Intellectual Property Rights" if the work or works embodying such
rights would be considered "joint works," as "joint works" is defined by, and
interpreted under the Copyright Act of 1976, as amended, 17 U.S.C. (S) 101. To
the extent that any ST owned Intellectual Property Rights or any Jointly Owned
Intellectual Property comprise or contain QI owned Intellectual Property Rights
or derivative works based upon QI owned Intellectual Property Rights, then ST
may only use such rights in connection with the manufacture and sale of
Products.
SECTION 9: WARRANTIES - SUPPORT
- -------------------------------
9.1 The "Warranty Period" for ST shall be in effect for * following ST's
acceptance of the QI Deliverables incorporated in a Product. The "Warranty
Period" for a Customer shall be in effect for * following the date of the first
shipment of a Product to such Customer. QI warrants that during the Warranty
Period, the Product shall operate in all material respects in accordance with
the Documentation therefor. During the Warranty Period, ST/Customer shall
promptly notify QI in writing of any instances where the Product does not
operate in all material respects in accordance with the Documentation. QI will
use its reasonable good faith efforts to remedy the situation within * in
accordance with the Documentation and Acceptance Criteria. In the event that QI
is unable to remedy the situation within the time frame specified above, QI will
provide ST/Customer with a written detailed plan, including a schedule and
outlining the problem and possible resolutions.
9.2 During the Warranty Period, QI will provide, free of charge, the
following support services to ST/Customer relating to QI Deliverables:
(a) Telephone support services to which ST/Customer can ask all
questions related to the use of QI Deliverables. QI's engineers or other
competent personnel shall use their good faith efforts promptly to address
questions from ST/Customer and to return calls to ST/Customer. QI shall render
such advice necessary or appropriate to ST/Customer concerning the use of QI
Deliverables and, if need be, shall help to identify solutions to bypass
problems.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
9
<PAGE>
(b) The forwarding to ST/Customer of any documents and information,
other than source code, related to the use of QI Deliverables, which describe
solutions to most frequent difficulties, as and when such documents are
developed by QI from time to time.
(c) Such reasonable on-site assistance at the location indicated by
ST/Customer, which consists of assisting ST/Customer in defining the problem and
obtaining elements necessary to find a solution.
9.3 The Parties agree to use their good faith efforts to negotiate and
agree upon such reasonable terms and conditions for QI to provide support and
maintenance, after the Warranty Period, to ST and/or Customers relating to QI
Deliverables.
9.4 QI will use its good faith commercially reasonable efforts to
establish direct Customer support services to be provided to Customers
worldwide. In connection with such worldwide Customer support services, ST will
use its good faith commercially reasonable efforts to make available to QI the
facilities of the established worldwide customer service network of ST and of ST
Affiliates, and also to provide the resources necessary, as will be agreed to by
the Parties, for technical interface with Customers through such established
worldwide customer service network.
9.5 The Parties agree to use their good faith efforts to negotiate and
agree upon such reasonable terms and conditions for QI to provide ST with new
functionalities of the Software and the documentation therefor.
9.6 ST DELIVERABLES AS LISTED IN SECTION 4.1 OF THE STATEMENT OF WORK ARE
PROVIDED TO QI "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR
IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, INCLUDING THE WARRANTY THAT ST
DELIVERABLES DO NOT OR WILL NOT INFRINGE THE RIGHTS OF A THIRD PARTY.
SECTION 10: TERM AND TERMINATION
- --------------------------------
10.1 Term. This Contract shall commence on the Effective Date and shall
----
continue until terminated as provided herein.
10.2 Termination of Contract. This Contract may be terminated at any time
-----------------------
by a Party for material breach of this Contract by the other Party, if such
breaching Party does not cure such breach within thirty (30) days after
receiving written notice thereof. The Parties acknowledge that non-payment of
royalties or other payments hereunder when due is a material breach.
Notwithstanding the foregoing, the cure period for non-payment of royalties or
other payments hereunder shall be five (5) days after receipt of written notice
of such breach.
10.3 Termination of License Grant. Notwithstanding any other provision of
----------------------------
this Contract, QI may terminate the rights and license granted to ST under
Section 4 if ST has breached its payment obligations to QI, and QI terminates
the Contract in accordance with Section 10.2 for such breaches. Notwithstanding
the foregoing, ST and ST's Affiliates and/or
10
<PAGE>
their subcontractors shall have the right, after such termination, to sell any
Products in inventory at the time of termination, subject to payment of royalty
thereon.
10.4 Survival. The rights and obligations contained in the following
--------
sections shall survive any termination or expiration of this Contract: Sections
4 (except as provided in Section 10.3), 5, 8, 11 through 16, and 18 (as
applicable).
10.5 Reservation of Rights and Remedies. Except as set forth in Section
----------------------------------
16.1, upon termination of this Contract for any reason, each Party shall have
all rights and remedies available to it in law or in equity with respect to the
other Party.
SECTION 11: CONFIDENTIALITY
- ---------------------------
11.1 Confidentiality. ST acknowledges that the Proprietary Items
---------------
constitute trade secrets, proprietary property and/or confidential information
of QI. Accordingly, at all times during and after the date of this Contract
(regardless of whether or not ST and QI are engaged in any business
relationship), without the prior written consent of QI:
(a) All Proprietary Items in ST's possession, will be held in
confidence by ST, and ST will not, directly or indirectly, communicate or
disclose any Proprietary Items to any Person or permit any Person to have access
to or possession of any Proprietary Items, except as necessary in connection
with ST's performance of its rights under this Contract. ST agrees that any
Person to whom ST discloses any of the Proprietary Items, or who will have
access to the Proprietary Items, will have signed a confidentiality agreement,
in content substantially similar to the confidentiality provisions of this
Contract.
(b) ST will take all reasonable measures necessary to preserve the
confidentiality of the Proprietary Items and to safeguard against unauthorized
disclosures and uses of the Proprietary Items, which measures shall include the
highest degree of care that ST utilizes to protect its own Proprietary Items of
a similar nature. ST agrees to notify promptly QI in writing of any misuse,
unauthorized disclosure or misappropriation of Proprietary Items which may come
to ST's attention.
(c) ST will not use or permit the use of any Proprietary Items for any
purpose, and ST will not make or retain any copy of any Proprietary Items,
except as necessary in connection with its performance under this Contract.
11.2 Legal Requirement to Disclose. ST may disclose Proprietary Items to
-----------------------------
other Persons, but only to the extent required under applicable law or by a
government order, decree, regulation or rule, provided that ST gives QI
reasonable written notice with sufficient opportunity to seek a protective order
prior to such disclosure.
11.3 Ownership of Propriety Items. The Proprietary Items are and will be
----------------------------
and remain the exclusive property of QI. At QI's request, ST will promptly
destroy, erase or deliver to QI all copies of any documents containing any
Proprietary Items which are in ST's possession or control or the possession or
control of any Person to whom disclosed by or on behalf of ST under this
Contract except to the extent that ST is not in breach of this Contract and ST
requires such Proprietary Items to obtain the full benefits of its rights
granted in this Contract.
11
<PAGE>
11.4 ST's Proprietary Items. The provisions of this Section 11 shall
----------------------
apply mutatis mutandis to the specifications and any other confidential
information provided by ST to QI.
SECTION 12: EXPORTATION OF TECHNICAL DATA OR PRODUCTS
- -----------------------------------------------------
ST shall not, without the prior written consent of QI and the Office
of Export Administration, United States Department of Commerce, knowingly re-
export, export, or ship, or cause to be re-exported, exported, or shipped,
directly or indirectly, any software licensed hereunder, or any related
technology, or any direct or indirect product thereof, to any country to which,
under the laws of the United States, QI is or may be prohibited from exporting
its technology or its direct or indirect product. The provisions of this
paragraph shall extend automatically to any other destination to which the U.S.
Office of Export Administration at any time during the life of this Contract
restricts or prohibits the export of technical data or any direct or indirect
product thereof.
SECTION 13: INDEMNIFICATION
- ---------------------------
13.1 Mutual. Each Party agrees to defend, indemnify and hold harmless the
------
other Party and its officers, directors, employees, agents and contractors
("Indemnitees") from and against any and all claims, actions, liabilities,
obligations, damages, losses, demands, recoveries, deficiencies, costs or
expenses, including without limitation, reasonable attorneys fees and expenses,
which an Indemnitee may suffer or incur connected with, resulting from or
arising out of such Party's breach of its representations, warranties and/or
covenants made in this Contract.
13.2 Licensed Intellectual Property.
------------------------------
(a) QI agrees to defend, indemnify and hold harmless ST from and
against any and all claims, actions, liabilities, obligations, damages, losses,
demands, recoveries, deficiencies, costs or expenses, including without
limitation, reasonable attorneys fees and expenses, which ST may suffer or incur
connected with, resulting from or arising out of the infringement or
misappropriation of a third party Intellectual Property Right by QI
Deliverables. The foregoing indemnity will not apply to any infringement or
misappropriation claim arising from (i) any modifications to QI Deliverables
wherein the claim arises as a result of such modification and the modification
was made by parties other than QI or a Person under QI's control, or (ii) any
combination of any QI Deliverables with other products or components where there
would be no infringement absent such use with such other products or components
(excluding the STi5505/STi5508 and/or other software embedded therein), or (iii)
any ST Deliverables or any portion of QI Deliverables made in whole or in part
in accordance with ST's specifications.
(b) Notwithstanding the foregoing, QI shall have no obligation to
defend, indemnify or hold ST or any Affiliate harmless under this Contract with
respect to any claims, actions, liabilities, obligations, damages, losses,
demands, recoveries, deficiencies, costs or expenses connected with, resulting
from or arising out of the infringement or misappropriation of any absolutely
necessary claim(s) of a patent(s) which reads on an industry standard for which
a license to such claim(s) is not available to QI on a reasonable and non-
discriminatory basis. An absolutely necessary claim(s) of a patent(s) is a
claim(s) which is infringed by the manufacture,
12
<PAGE>
import, use or sale of the Product which is compliant with an industry standard,
such as the CSS Compliant standard for DVD, because the Product, solely because
of the requirement to implement the standard, cannot be manufactured, used,
distributed, offered to be sold, sold, imported and/or otherwise transferred
without infringing such claim(s). The claim of a third party patent is not an
absolutely necessary claim if it would be obvious to one ordinarily skilled in
the art that the claim can be designed around and the Product would still be
compliant with the industry standard.
(c) Notwithstanding any provisions of the Contract to the contrary,
and without limiting the generality of Section 13.2, unless otherwise agreed and
superseded by an addendum, ST shall pay all royalties, licenses or other fees
payable to third parties which would be due or payable as a result of the
manufacture, use, distribution, offering for sale, sale, import or export of an
ST product or an ST Customer product.
13.3 Requirements. The indemnification provisions set forth herein are
------------
predicated on the indemnitee giving prompt written notice of any claim for which
indemnification is required, tender the defense of any such claim to the
indemnifying Party, providing full cooperation for such defense at the
indemnifying Party's expense, and not settling without the indemnifying Party's
prior written approval, not to be unreasonably withheld. The indemnitee may
participate in any such defense or settlement with counsel of its own choosing
at its own expense.
13.4 Options. If any of the software licensed hereunder becomes, or in
-------
QI's opinion is likely to become, the subject of a claim of infringement, then
ST will permit QI, at QI's option and expense, (a) to procure for ST the right
to continue using the same under the terms of this Contract, or (b) to replace
or modify the same so that it becomes non-infringing and equivalent in function.
13.5 EXCLUSIVE OBLIGATIONS. THE PROVISIONS OF THIS SECTION 13 ARE QI'S
---------------------
EXCLUSIVE OBLIGATIONS WITH RESPECT TO INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS.
SECTION 14: REPRESENTATIONS AND WARRANTIES
- ------------------------------------------
14.1 QI represents and warrants that the QI Deliverables shall meet the
technical specifications contained in Statement of Work in all material
respects.
14.2 QI represents and warrants that it has the full right and power to
enter into this Contract and grant the licenses contained herein.
14.3 QI represents and warrants that it has no knowledge that the QI
Deliverables infringe any Intellectual Property Right of any third party.
14.4 ST represents and warrants that it has no knowledge that the Product
infringes any Intellectual Property Right of any third party.
14.5 QI represents and warrants that the QI Deliverables shall be Year
2000 compliant in that a QI Deliverable shall provide and/or receive data within
and between the 20th and 21st
13
<PAGE>
centuries, provided that all hardware, software and firmware used in connection
with the QI Deliverable properly exchanges accurate date data with it.
14.6 Notwithstanding any other provision of this Agreement to the
contrary, QI shall not be liable to ST for any failure or delay in performance
under this Contract, or for any breach of any representation or warranty under
this Contract to the extent that such failure, delay or breach is due to or
results from any problems, errors or deficiencies in the ST Deliverables that ST
is delivering under section 4.1 of the Statement of Work or any actual or
alleged infringement of any third party intellectual property right by ST
Deliverables under section 4.1 of the Statement of Work.
14.7 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN QI MAKES NO OTHER
WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, WITH REGARD TO ANY SOFTWARE LICENSED
HEREUNDER OR ANY PARTS THEREOF, AND THAT QI EXPLICITLY DISCLAIMS ALL WARRANTIES
OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE. FURTHER, QI
EXPRESSLY DOES NOT WARRANT THAT THE SOFTWARE LICENSED HEREUNDER OR ANY PARTS
THEREOF, WILL BE ERROR FREE, WILL OPERATE WITHOUT INTERRUPTION OR WILL BE
COMPATIBLE WITH ANY HARDWARE OR SOFTWARE.
SECTION 15: SOURCE CODE ESCROW
- ------------------------------
Within six (6) months of the Effective Date, QI shall escrow the source code for
the Software, together with all documentation reasonably necessary for a
programmer skilled in the art to maintain and support the Software (the
"Escrowed Materials"), with Data Securities Inc. (the "Escrow Agent"), in
accordance with a Source Code Escrow Agreement substantially in the form
attached hereto as Appendix 4 or as otherwise agreed by the Parties. All escrow
fees shall be boure by ST. An "Insolvency Event" shall be deemed to have
occurred if QI has availed itself of, or been subjected to by any third party, a
proceeding in bankruptcy in which QI is named debtor; an assignment by QI for
the benefit of its creditors; the appointment of a receiver for QI; or any other
proceeding involving insolvency or the protection of, or from creditors, and the
same has not been discharged or terminated without any prejudice to ST's rights
or interests under this Agreement within sixty (60) days. An Insolvency Event
shall also be deemed to have occurred if QI does not fulfill its support
obligations under Section 9.2; or in the event that the Parties fail to reach
agreement, pursuant to Section 9.3, for support and maintenance after the
Warranty Period. ST may give written notice by certified mail to the Escrow
Agent and QI of the occurrence of an Insolvency Event hereunder. Unless within
fifteen (15) days thereafter QI files with the Escrow Agent its affidavit
executed by a responsible executive officer clearly refuting the alleged
Insolvency Event or showing that the Insolvency Event has been cured, then the
Escrow Agent shall upon the sixteenth (16th) day deliver to ST the Escrowed
Materials solely for ST's use in maintaining and supporting the Product and not
for any other use.
SECTION 16: CHOICE OF LAWS; CONSENT TO JURISDICTION; LIMITATION OF LIABILITY
- ----------------------------------------------------------------------------
16.1 Governing Law. This Contract shall be governed by and construed in
-------------
accordance with the substantive laws of the state of New York, U.S.A. without
regard to its conflict of laws provisions. The Parties shall attempt to resolve
any dispute arising in connection with this
14
<PAGE>
Contract amicably by mutual agreement. Any such dispute which cannot be resolved
by agreement within a period of sixty (60) days after the date of delivery of a
notice describing the dispute referred to as "Notice of Claim" shall be finally
settled by an arbitral tribunal consisting of three arbitrators appointed by the
Court of Arbitration of the International Chamber of Commerce (ICC). The
arbitration tribunal, including all staff, all witnesses, and attending non-
Parties, shall be legally bound by agreements and/or orders to prevent
disclosure of any information which may be disclosed to them in connection with
arbitration proceedings conducted hereunder. The arbitration shall take place in
New York, New York in the English language and according to the Rules of
conciliation and arbitration of the ICC. The arbitrators shall apply the laws of
the state of New York to the merits of the dispute and in all cases shall decide
in accordance with the terms of this Contract. The arbitral decision and award
shall be final and binding and shall deal with the questions of costs of
arbitration an all matters related thereto. For the avoidance of doubt, nothing
in this Section 16.1 shall prevent either Party seeking interim injunctive
relief from a court of appropriate jurisdiction.
16.2 Limitation of Liability.
-----------------------
(a) Except for liability arising under Sections 5.1 and 13.2, in no
event shall either Party be liable to the other Party for actual damages
resulting from claims relating to this Contract which in the aggregate exceed *
regardless of the form of action, provided that this limitation will not apply
to claims for bodily injury or damage to real property for which a Party is
legally liable.
(b) With respect to QI's obligations to indemnify, defend and hold ST
harmless under Section 13.2, in no event shall QI financial responsibility under
Section 13.2 in the aggregate exceed * ("QI's Indemnification Cap").
(c) In no event shall either Party be liable to the other Party for
incidental damages, lost profits, lost savings, or any other consequential
damage, regardless of whether the claim is for breach of contract, warranty,
tort (including negligence), failure of a remedy to accomplish its purpose or
otherwise, even if such Party has been advised of the possibility of such
damages. Except as stated in Section 13, neither Party shall be liable for any
damages claimed by the other Party based on any third party claim.
SECTION 17: FORCE MAJEURE
- -------------------------
Neither Party to this Contract will be liable to the other for any failure or
delay in performance under this Contract due to circumstances beyond its
reasonable control including, without limitation, Acts of God, accident, labor
disruption, and official, governmental and judicial action not the fault of the
Party failing or delaying in performance.
SECTION 18: MISCELLANEOUS
- -------------------------
18.1 Notices. Notices by either Party to the other shall be given by
-------
registered or certified mail, return receipt requested, or by telegram, with
proof of delivery, all charges prepaid. All statements, and notices hereunder
shall be given at the respective addresses of QI and ST as set forth on the
first page of this Contract unless written notice of a change of address
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
15
<PAGE>
is given and for ST at: STMicroelectronics at Technoparc du pays de Gex 165 Rue
Edouard Branly - B.P. 1 12 01637 ST GENIS POUILLY CEDEX (France). Attention:
General Counsel. Notices shall be deemed effective the date the notice is given,
except that notices of change of address shall be effective when received.
18.2 Public Announcements. No press release or public notice relating to
--------------------
this Contract may be made by either Party without receiving the other Party's
prior written consent except where same may be required by law or administrative
rule. If requested by one Party, the other Party shall promptly supply the
other Party with copies of all public statements and of all publicity and
promotional material relating to this Contract and the sale and promotion of
Products.
18.3 Relationship between Parties. The relationship between ST and QI is
----------------------------
that of independent contractors, and not partners, joint ventures or agents.
Neither Party has any authority to bind the other Party in any manner. Neither
Party will be liable for any debts or liabilities of the other Party, and,
except as otherwise provided in this Contract, each Party will be responsible
for its own expenses incurred in performing its obligations under this Contract.
18.4 Entire Understanding. This Contract, together with the Exhibits and
--------------------
Schedules to this Contract, state the entire understanding between the Parties
with respect to the subject matter hereof and supersede all earlier and
contemporaneous oral and written communications and agreements with respect to
the same subject matter. Neither this Contract, nor any other Exhibit or
Schedule to this Contract, may be amended or modified except in a written
document signed by both Parties.
18.5 Additional Documents. Each of the Parties hereto shall take or cause
--------------------
to be taken all action, or do or cause to be done all things, or execute and
deliver any and all documents, instruments and writing necessary, convenient,
proper or advisable to consummate, make effective, and carry out the terms and
provisions of this Contract.
18.6 Parties in Interest. This Contract will bind, benefit, and be
-------------------
enforceable by QI and ST, and their respective successors and, to the extent
permitted hereby, assigns. Without the prior written consent of a Party, the
other Party may not assign or subcontract any of its rights or obligations under
this Contract to any Person. Nothing herein expressed or implied is intended or
shall be construed to confer upon or to give to any Person, other than the
Parties hereto, their respective successors and permitted assigns, any rights or
remedies under or by reason of this Contract. Notwithstanding, the foregoing,
either Party may assign this Contract, without the consent of the other Party,
to an entity that acquires all or substantially all of the business or assets of
such Party to which this Contract pertains, whether by merger, reorganization,
acquisition, sale or otherwise. Any attempted assignment in violation of this
Section 18.6 shall be void.
18.7 No Waivers. No failure to exercise, delay in exercising, or single
----------
or partial exercise of any right, power or remedy by either Party, and no course
of dealing between the Parties, will constitute a waiver of, or will preclude
any other or further exercise of, the same or any other right, power or remedy.
16
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18.8 Severability. If any provision of this Contract is construed to be
------------
invalid, illegal or is unenforceable, then the remaining provisions will not be
affected thereby and will be enforceable without regard thereto.
18.9 Counterparts. This Contract may be executed in any number of
------------
counterparts, each of which when so executed and delivered will be an original
hereof, and it will not be necessary in making proof of this Contract, and will
not affect its interpretation.
18.10 Section Headings. Section and subsection headings are for
----------------
convenience of reference only, do not constitute part of this Contract, and will
not affect its interpretation
WITNESS THE DUE EXECUTION AND DELIVERY HEREOF AS OF THE DATE FIRST STATED ABOVE.
QUADRANT INTERNATIONAL, INC. MICROELECTRONICS, SA
By /s/ Francis E. Wilde By: /s/ Philippe Lambinet
-------------------- -----------------------
Philippe Lambinet
Group Vice-President
Digital Video Division General Manager
17
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EXHIBIT 10.9
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
Consumer Products - Decoder Hardware
AN AGREEMENT
- ------------
BY AND BETWEEN
- --------------
Dolby Laboratories Licensing Corporation and Quadrant International, Inc.
(hereinafter called "LICENSOR") (hereinafter called "LICENSEE")
of 100 Potrero Avenue of 269 Great Valley Parkway
San Francisco, CA 94103-4813 Malvern, PA 19355
United States of America United States of America
Facsimile telephone number of LICENSOR for transmission of quarterly royalty
reports (Section 4.05): (415) 863-1373
LICENSOR's bank and account number for wire transfer of royalty payments
(Section 4.05):
Bank: Wells Fargo Bank
Address: 464 California Street, San Francisco, CA 94104 U.S.A.
Account Name: Dolby Laboratories Licensing Corporation
Account Number: 4001-191451
ABA Number: 121000248
Identification of bank with respect to whose prime rate interest is calculated
on overdue royalties (Section 4.06): Wells Fargo Bank
Address of LICENSEE for communications not otherwise specified (Section 8.04):
SIGNATURES
- ----------
On behalf of LICENSOR On behalf of LICENSEE
By: [SIGNATURE ILLEGIBLE] By: /s/ Jason Liu
--------------------------- ---------------------------------
Place: San Francisco, CA Place: Quadrant International, Inc.
---------------------- ------------------------------
Date: 5/20/97 Date: 5/13/97
------------------------- --------------------------------
Witnessed By: Witnessed By:
______________________________ ______________________________________
Effective Date of Agreement:____________ Initial Payment $10,000
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
Consumer Products - Decoder Hardware
INDEX
-----
Preamble
I. DEFINITIONS
Section 1.01 - "LICENSOR"
Section 1.02 - "LICENSEE"
Section 1.03 - "Application"
Section 1.04 - "Patent"
Section 1.05 - "Related Application"
Section 1.06 - "Related Patent"
Section 1.07 - "Scheduled Patents"
Section 1.08 - "Dolby Digital AC-3 Audio System Specifications"
Section 1.09 - "Licensed Trademark"
Section 1.10 - "Licensed Device"
Section 1.11 - "Licensed Product"
Section 1.12 - "Patent Rights"
Section 1.13 - "Know-How"
Section 1.14 - "Confidential Information"
Section 1.15 - "Non-Patent Country"
Section 1.16 - "LICENSEE's Trade Name and Trademarks"
Section 1.17 - "Other-Trademark Purchaser"
Section 1.18 - "Licensee Copyrighted Works"
Section 1.19 - The "Consumer Price Index"
Section 1.20 - The "Effective Date"
II. LICENSES GRANTED
Section 2.01 - Licenses Granted to LICENSEE
Section 2.02 - Limitation of Licenses Granted
III. OTHER OBLIGATIONS OF LICENSEE AND LICENSOR
Section 3.01 - Use of Licensed Trademarks
Section 3.02 - Ownership of the Licensed Trademarks
Section 3.03 - Maintenance of Trademark Rights
Section 3.04 - Patent, Trademark and Copyright Enforcement
Section 3.05 - Other-Trademark Purchasers
Section 3.06 - Patent Marking
Section 3.07 - Copyright Notice
Section 3.08 - Furnishing of Copyrighted Works; Use of Copyrighted
Works
Section 3.09 - License Notice
Section 3.10 - Furnishing of Know-How
Section 3.11 - Use of Know-How and Confidential Information
<PAGE>
IV. PAYMENTS
Section 4.01 - Initial Payment
Section 4.02 - Royalties
Section 4.03 - Section Deleted
Section 4.04 - Royalty Applicability
Section 4.05 - Royalty Payments and Statements
Section 4.06 - Royalties in Non-Patent Country
Section 4.07 - Books and Records
Section 4.08 - Rights of Inspecting Books and Records
V. STANDARDS OF MANUFACTURE AND QUALITY
Section 5.01 - Standardization and Quality
Section 5.02 - Right to Inspect Quality
VI. TERMINATION AND EFFECT OF TERMINATION
Section 6.01 - Expiration of Agreement
Section 6.02 - Termination for Cause
Section 6.03 - Option to Terminate in a Non-Patent Country
Section 6.04 - Effect of Termination
VII. LIMITATIONS OF RIGHTS AND AUTHORITY
Section 7.01 - Limitation of Rights
Section 7.02 - Limitation of Authority
Section 7.03 - Disclaimer of Warranties and Liability; Hold Harmless
Section 7.04 - Limitation of Assignment by LICENSEE
Section 7.05 - Compliance with U.S. Export Control Regulations
VIII. MISCELLANEOUS PROVISIONS
Section 8.01 - Language of Agreement; Language of Notices
Section 8.02 - Stability of Agreement
Section 8.03 - Public Announcements
Section 8.04 - Address of LICENSEE and LICENSOR for all Other
Communications
Section 8.05 - Applicable Law
Section 8.06 - Choice of Forum; Attorneys' Fees
Section 8.07 - Construction of Agreement
Section 8.08 - Captions
Section 8.09 - Singular and Plural
Section 8.10 - Complete Agreement
Section 8.11 - Severability
Section 8.12 - Company Representation and Warranty
Section 8.13 - Execution
<PAGE>
Appendix A - Scheduled Patents
Appendix B - Dolby Digital AC-3 Audio System
Appendix C - Dolby Digital AC-3 Licensing Information Manual
<PAGE>
DIGITAL AUDIO SYSTEM LICENSE AGREEMENT
Consumer Products - Decoder Hardware
WHEREAS, LICENSOR is engaged in the field of audio noise reduction and
analog and digital signal processing systems and has developed noise
reduction systems useful for audio tape recording, surround sound systems
for home entertainment and for other applications;
WHEREAS, LICENSOR's audio processing systems have acquired a
reputation for excellence and LICENSOR's trademarks have acquired valuable
goodwill;
WHEREAS, LICENSOR has licensed over 160 companies to make, use and
sell consumer audio hardware incorporating LICENSOR's audio systems and
marked with LICENSOR's trademarks; and
WHEREAS, LICENSOR has developed the Dolby Digital AC-3 audio system
which uses a new technique for encoding and decoding of audio frequency
data in digital form with a substantially reduced bit-rate while
maintaining a high quality decoded audio signal, which is used in a variety
of applications, such as television and cable broadcast and on certain
consumer media; and
WHEREAS, LICENSOR's Dolby Digital AC-3 audio system and its
manufacture are the subject of substantial know-how owned by LICENSOR;
WHEREAS, LICENSOR's Dolby Digital AC-3 audio system and its
manufacture embody inventive subject matter which are the subject of
international patent and patent applications owned or licensable by
LICENSOR,
WHEREAS, the manufacture and sale of LICENSOR's Dolby Digital AC-3
audio system requires the reproduction of copyrighted works owned or
licensable by LICENSOR;
WHEREAS, LICENSOR represents and warrants that it has rights to grant
licenses under such know- how, patents and patent applications and
copyrighted works and under its trademarks;
WHEREAS, LICENSEE is engaged in the manufacture and sale of products
for the home electronics market; and
WHEREAS, LICENSEE believes it can develop substantial demand for
equipment to decode audio signals using LICENSOR's Dolby Digital AC-3 audio
system;
WHEREAS, LICENSEE desires a non-exclusive license to manufacture and
sell decoders using LICENSOR's Dolby Digital AC-3 audio system under
LICENSOR's trademarks, know-how, copyrighted works, patents and patent
applications; and
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
1
<PAGE>
WHEREAS, LICENSOR is willing to grant such a license under the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, it is agreed by and between LICENSOR and LICENSEE as
follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.01 - "LICENSOR" means Dolby Laboratories Licensing
-------------------------
Corporation, a corporation of the State of New York, having a place of
business as indicated on the title page of this Agreement, and its
successors and assigns.
Section 1.02 - "LICENSEE" means the corporation identified on the
-------------------------
title page of this Agreement and any subsidiary thereof of whose ordinary
voting shares more than 50% are controlled directly by such corporation,
but only so long as such control exists.
Section 1.03 - "Application" means an application for the protection
----------------------------
of an invention or an industrial design; references to an "Application"
shall be construed as references to applications for patents for
inventions, inventors' certificates, utility certificates, utility models,
patents or certificates of addition, inventors' certificates of addition,
utility certificates of addition, design patents, and industrial design
registrations.
Section 1.04 - "Patent" means patents for inventions, inventors'
-----------------------
certificates, utility certificates, utility models, patents or certificates
of addition, inventors' certificates of addition, utility certificates of
addition, design patents, and industrial design registrations.
Section 1.05 - "Related Application" means an Application, whether
------------------------------------
international or in the same or another country or region, which
(1) is substantially the same as (e.g., it does not include any new
matter in the sense of the United States Patent Law) an Application or
Patent listed in Appendix A, entitled "Scheduled Patents," which is
attached hereto and forms an integral part of this Agreement (for example,
without limiting the foregoing, a continuation Application, a corresponding
Application, an Application to reissue, or a refiled Application), or
(2) is substantially only a portion of (e.g., it contains less than an
Application or Patent listed in Appendix A and, it does not include any new
matter in the sense of the United States Patent Law) an Application or
Patent listed in Appendix A (for example, a divisional Application, or a
corresponding or refiled Application in the nature of a divisional
Application).
Section 1.06 - "Related Patent" means:
-------------------------------------
(1) a Patent granted on an Application listed in Appendix A,
2
<PAGE>
(2) a Patent granted on a Related Application,
(3) a reissue of a Patent of Sections 1.06(1) or 1.06(2), and
(4) a reexamination certificate of a Patent of Sections 1.06(1),
1.06(2), or 1.06(3).
Section 1.07 - "Scheduled Patents" means the Applications and Patents
-----------------------------------
listed in Appendix A together with Related Applications and Related
Patents.
Applications and Patents which contain not only common subject matter
but also additional subject matter going beyond the disclosure of
Applications and Patents of this Section (for example, without limiting the
foregoing, a continuation-in-part Application, or a corresponding or
refiled Application in the nature of a continuation-in-part Application)
shall be deemed to be Scheduled Patents only with respect to that portion
of their subject matter common to the Applications and Patents of this
Section.
Section 1.08 - "Dolby Digital AC-3 Audio System Specifications" means
---------------------------------------------------------------
the specifications for the Dolby Digital AC-3 audio system, comprising the
claims and teachings of the Scheduled Patents, the Dolby Digital AC-3 audio
system operating parameters as specified in Appendix B entitled "Dolby
Digital AC-3 Audio System," the Dolby Digital AC3 Licensing Manual referred
to in Appendix C, the Licensed Copyrighted Works and the Know-How.
Appendices B and C are attached hereto and form an integral part of this
Agreement.
Section 1.09 - "Licensed Trademark" means one or more of the
-----------------------------------
following: (a) the word mark "Dolby", (b) the device mark [DOUBLE-D LOGO]
which is also referred to as the `Double-D' symbol and (c) the term "AC-3".
Section 1.10 - "Licensed Device" means a digital audio circuit having
--------------------------------
Dolby Digital AC-3 Audio System Specifications, whether made in discrete
component, integrated circuit, or other forms, for decoding a digital
bitstream into one or more audio channels. A circuit counts as one
"Licensed Device" for each full frequency range audio channel it provides.
Section 1.11 - "Licensed Product" means a complete ready to use
---------------------------------
consumer entertainment product, such as a multi-channel A/V receiver, DVD
player, or personal computer (PC), or a complete, ready-to-install PC audio
subsystem which:
(1) contains one or more Licensed Devices, and
(2) is intended or designed for use in decoding an AC-3 digital audio
bitstream.
Every Licensed Product containing three or more Licensed Devices must
also contain a Dolby Consumer Surround Decoder with Directional Enhancement
licensed under a separate agreement, except that the Licensed Consumer
Surround Decoder and the Directional Enhancement Circuit in such Licensed
Product shall be royalty-free, so
3
<PAGE>
long as applicable royalties under Sections 4.01 and 4.02 under this
Agreement are payable.
The only exception to this provision are outboard decoders without
independent volume controls intended to be used exclusively in conjunction
with audio-visual receivers or amplifiers that already contain said
Consumer Surround Decoder and Directional Enhancement circuits. A Licensed
Product is not a semiconductor chip, a partially assembled product, a
product in kit form, or a knocked-down or semi-knocked-down product.
Section 1.12 - "Patent Rights" means:
------------------------------------
(1) the Scheduled Patents; and
(2) such Patents and Applications directed to Licensed Products that
LICENSOR may own or gain rights to license during the term of this
Agreement and which LICENSOR may agree to include in the Patent Rights
without payment of additional compensation by LICENSEE.
The Patent Rights do not include such other Applications and Patents
as LICENSOR does not agree to include in the Patent Rights without payment
of additional compensation by LICENSEE.
Section 1.13 - "Know-How" means all proprietary information, trade
-------------------------
secrets, skills, experience, recorded or unrecorded, accumulated by
LICENSOR, from time to time prior to and during the term of this Agreement,
or licensable by LICENSOR, relating to the Licensed Devices and the
Licensed Products and all designs, drawings, reports, memoranda, blue-
prints, specifications and the like, prepared by LICENSOR or by others and
licensable by LICENSOR, insofar as LICENSOR deems the same to relate to and
be useful for the development, design, manufacture, sale or use of Licensed
Products. Know-How does not include Licensed Copyrighted Works, whether or
not published.
Section 1.14 - "Confidential Information" means technical and non-
-----------------------------------------
technical proprietary information of LICENSOR or LICENSEE, including,
without limiting the foregoing, marketing information, product plans,
business plans, royalty, and sales information so long as such information
is disclosed to the other party a) in written or other tangible form which
is clearly marked as being confidential or proprietary or b) orally or in
any other manner and is indicated as confidential at the time of disclosure
and thereafter summarized in writing within thirty (30) days after such
disclosure.
Section 1.15 - "Non-Patent Country" means a country in which there do
-----------------------------------
not exist, with respect to a Licensed Product, any Scheduled Patents
including any pending Application or unexpired Patent, which, but for the
licenses herein granted, are (or in the case of an Application, would be if
it were an issued Patent) infringed by the manufacture, and/or use, lease
or sale of such Licensed Product.
4
<PAGE>
Section 1.16 - "LICENSEE's Trade Name and Trademarks" means any trade
-----------------------------------------------------
name or trademark used and owned by LICENSEE.
Section 1.17 - "Other-Trademark Purchaser" means any customer of
------------------------------------------
LICENSEE who, with LICENSEE's knowledge, intends to resell, use or lease
the Licensed Products under a trademark other than LICENSEE's Trade Name
and Trademarks.
Section 1.18 - "Licensed Copyrighted Works" means all copyrighted
-------------------------------------------
works owned by LICENSOR or owned by others and which LICENSOR has the right
to sublicense, relating to the Dolby Digital AC-3 audio system and the
reproduction of which are required in order for LICENSEE to make or have
made for it Licensed Products, and to use, lease and sell the same.
Licensed Copyrighted Works exclude mask works fixed in a semiconductor chip
product.
Section 1.19 - The "Consumer Price Index" means the U.S. City Average
-----------------------------------------
Index (base of 1982-1984=100) of the Consumer Price Index for All Urban
Consumers as published by the Department of Labor, Bureau of Labor
Statistics of the United States Government. In the event that said Index
ceases to be published under its present name or form or ceases to be
published by the same government entity, reference shall be made to the
most similar index then available.
Section 1.20 - The "Effective Date" of this Agreement is the date of
-----------------------------------
execution hereof by the last party to execute the Agreement, or, if this
Agreement requires validation by any governmental or quasi-governmental
body, the "Effective Date" is the date of validation of this Agreement.
ARTICLE II
LICENSES GRANTED
----------------
Section 2.01 - Licenses Granted to LICENSEE
-------------------------------------------
LICENSOR hereby grants to LICENSEE:
(1) a personal, non-transferable, indivisible, and non-exclusive
license throughout the world under the Patent Rights, subject to the
conditions set forth and LICENSEE's performance of its obligations,
including paying royalties due, to make or have made for it Licensed
Products, and to use, lease, import and sell the same;
(2) a personal, non-transferable, indivisible, and non-exclusive
license throughout the world to use the Know-How and to reproduce the
Licensed Copyrighted Works in connection with the design, manufacture, and
sale of the Licensed Products and to use the Licensed Trademarks on the
Licensed Products and in connection with the advertising and offering for
sale of Licensed Products bearing one or more of the Licensed Trademarks
subject to the conditions set forth in this Agreement and LICENSEE's
performance of its obligations, including the payment of royalties; and
5
<PAGE>
(3) a personal, non-transferable, indivisible, non-exclusive, and
royalty-free license throughout the world under the Patent Rights and to
use the Know-How and to reproduce the Licensed Copyrighted Works in
connection with the manufacture, use, lease and sale of spare parts solely
for the repair of Licensed Products manufactured by LICENSEE under this
Agreement.
Section 2.02 - Limitation of Licenses Granted
---------------------------------------------
Notwithstanding the licenses granted under Section 2.01:
(1) no license is granted to lease, sell, transfer, or otherwise
dispose of any part of a Licensed Product, including, without limiting the
foregoing, a semiconductor chip specially adapted for use in a Licensed
Product, which part (a) is a material part of an invention which is the
subject of a Scheduled Patent and which part is not a staple article or
commodity of commerce suitable for substantial noninfringing use or (b) is
not a spare part solely for the repair of a Licensed Product manufactured
by Licensee under this Agreement;
(2) no license is granted under this Agreement to lease, sell,
transfer, or otherwise dispose of any partially assembled products,
products in kit form, and knocked-down or semi-knocked-down products;
(3) no license is granted under this Agreement with respect to any of
LICENSOR's other licensed technologies;
(4) no license is granted under this Agreement to use any Licensed
Trademark in connection with offering for sale or in advertising and/or
informational material relating to any Licensed Product which is not marked
with the mark specified in Section 3.01(1) of this Agreement;
(5) no license is granted under this Agreement with respect to the use
of any Licensed Trademark on or in connection with products other than
Licensed Products;
(6) no right is granted with respect to LICENSOR's trade name "Dolby
Laboratories" except with respect to the use of said tradename on and in
connection with Licensed Products in the trademark acknowledgment and
license notice required by Sections 3.01(6) and 3.09, respectively;
(7) no license is granted to copy, prepare, make, or have made
derivative works based on the Licensed Copyrighted Works; and
(8) no right to grant sublicenses is granted under this Agreement.
ARTICLE III
OTHER OBLIGATIONS OF THE LICENSOR AND LICENSEE
----------------------------------------------
Section 3.01 - Use of Licensed Trademarks
-----------------------------------------
6
<PAGE>
The Licensed Trademarks have acquired a reputation for high quality
among professionals and consumers around the world. The performance
capability of the Dolby Digital AC-3 audio system is such that LICENSOR is
willing to allow the use of the Licensed Trademarks on certain Licensed
Products and in connection with their advertising and marketing to indicate
that the quality of such products conforms with the general reputation for
high quality associated with the Licensed Trademarks. LICENSEE's use of
the Licensed Trademarks is optional, however, if LICENSEE opts to use one
or more Licensed Trademarks, such use shall be subject to the obligations
of this Agreement as well as detailed regulations issued from time to time
by LICENSOR. Detailed regulations current at the time of execution of this
Agreement and additional to those set forth in this Agreement are set forth
in the section entitled "Trademark Usage" in the Dolby Digital AC-3
Licensing Information Manual of Appendix C which is attached hereto and
forms an integral part of this Agreement. LICENSEE shall comply with the
requirements of the body of this Agreement and those of the Dolby Digital
AC-3 Licensing Information Manual of Appendix C and such additional
regulations as LICENSOR may issue and shall ensure that its subsidiaries,
agents, distributors, and dealers throughout the world comply with such
requirements:
(1) LICENSEE shall prominently mark the Licensed Product on an exposed
surface thereof in the following way:
[DOLBY LOGO]
Alternatively, if the Licensed Product is a PC or PC subsystem, the
mark may appear as part of an opening screen or in an "about" window of the
application software controlling the Licensed Product.
(2) The mark specified in subsection (1) of this Section 3.01, may
also be used at least once in a prominent manner in all advertising and
promotions for such Licensed Product; such usages shall be no less
prominent and in the same relative size as the most prominent third party
trademark(s) appearing on such Licensed Product or in the advertising and
promotion thereof.
(3) LICENSEE may not use the Licensed Trademarks in advertising and
promotion of a product not marked in accordance with subsection (1) of this
Section 3.01, even if such product is a Licensed Product.
(4) In every use of a Licensed Trademark, except on the exposed main
control surface of a Licensed Product, LICENSEE shall give notice to the
public that such Licensed Trademark is a trademark by using the superscript
letters "TM" after the respective trademark, or by use of the trademark
registration symbol "(R)" (the capital letter R enclosed in a circle) as a
superscript after the respective trademark. LICENSOR shall inform LICENSEE
as to which notice form is to be used.
(5) LICENSEE shall use its best efforts to ensure that the appropriate
trademark notices, as set forth in subsection (3) above, appear in
advertising for such Licensed Products at the retail level.
7
<PAGE>
(6) LICENSOR's ownership of Licensed Trademarks shall be indicated
whenever used by LICENSEE, whether use is on a product or on descriptive,
instructional, advertising, or promotional material, by the most relevant
of the following acknowledgments: "`Dolby' is a trademark of Dolby
Laboratories", "The `Double-D' symbol is a trademark of Dolby
Laboratories", or "'Dolby' and the `DoubleD' symbol are trademarks of Dolby
Laboratories." On Licensed Products such words shall be used on an exposed
surface when space permits. LICENSEE shall use its best efforts to ensure
that such an acknowledgment appears in advertising at the retail level.
(7) Licensed Trademarks shall always be used in accordance with
established United States practices for the protection of trademark and
service mark rights, unless the requirements in the country or jurisdiction
in which the product will be sold are more stringent, in which case the
practice of such country or jurisdiction shall be followed. In no event
shall any Licensed Trademark be used in any way that suggests or connotes
that it is a common, descriptive or generic designation. Whenever the word
`Dolby' is used, the letter D shall be upper-case. The word `Dolby' shall
be used only as an adjective referring to a digital audio product, never as
a noun or in any other usage which may contribute to a generic meaning
thereof. In descriptive, instructional, advertising, or promotional
material or media relating to Licensed Products, LICENSEE must use the
Licensed Trademarks and expressions which include the Licensed Trademark
`Dolby' with an appropriate generic or descriptive term (e.g. "Dolby
Digital decoder", "Dolby Digital audio circuit", "Dolby Digital (AC-3)
transmission" etc.), with reference to Licensed Products and their use.
(8) All uses of the Licensed Trademarks are subject to approval by
LICENSOR. LICENSOR reserves the right to require LICENSEE to submit
proposed uses to LICENSOR for written approval prior to actual use. Upon
request of LICENSOR, LICENSEE shall submit to LICENSOR samples of its own
usage of the Licensed Trademarks and usage of the Licensed Trademarks by
its subsidiaries, agents, distributors, and dealers.
(9) Licensed Trademarks shall be used in a manner that distinguishes
them from other trademarks, service marks, symbols or trade names,
including LICENSEE's Trade Name and Trademarks.
(10) LICENSEE may not use the Licensed Trademarks on and in connection
with products that do not meet LICENSOR's quality standards.
(11) LICENSEE may not use the Licensed Trademarks on and in connection
with products other than Licensed Products.
Section 3.02 - Ownership of the Licensed Trademarks
---------------------------------------------------
LICENSEE acknowledges the validity and exclusive ownership by LICENSOR
of the Licensed Trademarks.
LICENSEE further acknowledges that it owns no rights in the Licensed
Trademarks nor in the tradename "Dolby Laboratories." LICENSEE acknowledges
and
8
<PAGE>
agrees that all rights that it may accrue in the Licensed Trademarks and in
the tradenames "Dolby Laboratories" will inure to the benefit of the owner
thereof, LICENSOR or LICENSOR's parent Dolby Laboratories, Inc.
LICENSEE further agrees that it will not file any application for
registration of the Licensed Trademarks or "Dolby Laboratories" in any
country, region, or under any arrangement or treaty. LICENSEE also agrees
that it will not use nor will it file any application to register in any
country, region, or under any arrangement or treaty any mark, symbol or
phrase, in any language, which is confusingly similar to the Licensed
Trademarks or "Dolby Laboratories".
Section 3.03 - Maintenance of Trademark Rights
----------------------------------------------
The expense of obtaining and maintaining Licensed Trademark
registrations shall be borne by LICENSOR. LICENSOR, as it deems necessary,
will advise LICENSEE of the grant of registration of such trademarks. Upon
request by either party, LICENSEE and LICENSOR will comply with applicable
laws and practices of the country of registration, including, without
limiting the foregoing, the marking with notice of registration and the
recording of LICENSEE as a registered or licensed user of such trademarks.
The expense of registering or recording LICENSEE as a registered user or
otherwise complying with the laws of any country pertaining to such
registration or the recording of trademark agreements shall be borne by
LICENSEE. LICENSEE shall advise LICENSOR of all countries where Licensed
Products are sold, leased or used.
Section 3.04 - Patent, Trademark and Copyright Enforcement
----------------------------------------------------------
LICENSEE shall immediately inform LICENSOR of all infringements,
potential or actual, which may come to its attention, of the Patent Rights,
Licensed Trademarks or Licensed Copyrighted Works. It shall be the
exclusive responsibility of LICENSOR, at its own expense, to terminate,
compromise, or otherwise act at its discretion with respect to such
infringements. LICENSEE agrees to cooperate with LICENSOR by furnishing,
without charge, except out-of-pocket expenses, such evidence, documents and
testimony as may be required therein.
Section 3.05 - Other-Trademark Purchasers
-----------------------------------------
If LICENSEE sells or leases Licensed Products on a mass basis to an
Other-Trademark Purchaser who does not hold a license with terms and
conditions substantially similar to this Agreement, LICENSEE shall inform
LICENSOR of the name, place of business, trademarks, and trade names of the
Other Trademark Purchaser before such Other-Trademark Purchaser sells,
leases, or uses Licensed Products. LICENSEE shall obtain agreement from
such Other-Trademark Purchaser not to modify, install, use, lease, sell,
provide written material for or about, advertise, or promote Licensed
Products in any way which is in conflict with any provision of this
Agreement. It shall be the responsibility of LICENSEE to inform the Other-
Trademark Purchaser of the provisions of this Agreement, to notify such
Other-Trademark Purchaser that the provisions of this Agreement shall be
applicable, through LICENSEE, in the same way as if the Licensed
9
<PAGE>
Products were sold by LICENSEE under LICENSEE's Trade Names and Trademarks,
to ensure by all reasonable means that such provisions are adhered to and,
if requested by LICENSOR, to provide to LICENSOR copies of such Other-
Trademark Purchaser's advertising, public announcements, literature,
instruction manuals, and the like. It shall be LICENSEE's responsibility to
inform said Other-Trademark Purchaser that any use of any of LICENSOR's
trademarks on or in conjunction with the Other-Trademark Purchaser's own
products can only be done under a separate license from LICENSOR.
Section 3.06 - Patent Marking
-----------------------------
LICENSEE shall mark each Licensed Product in the form, manner and
location specified by LICENSOR, with one or more patent numbers of Patents
in such countries under which a license is granted under this Agreement.
Section 3.07 - Copyright Notice
-------------------------------
3.07(l) - Where Applied LICENSEE shall apply the copyright notice
-----------------------
specified in subsection 3.07(2) of this Section 3.07 to Licensed Products
and all media embodying the Licensed Copyrighted Works.
3.07(2) - Form of Notice LICENSEE shall apply the following
-------------------------
copyright notice as required in subsection 3.07(l) of this Section 3.07:
This product contains one or more programs protected under
international and U.S. copyright laws as unpublished works. They are
confidential and proprietary to Dolby Laboratories. Their reproduction or
disclosure, in whole or in part, or the production of derivative works
therefrom without the express permission of Dolby Laboratories is
prohibited. Copyright 1992-1996 by Dolby Laboratories, Inc. All rights
reserved.
Section 3.08 - Furnishing of Licensed Copyrighted Works; Use of
---------------------------------------------------------------
Licensed Copyrighted Works
--------------------------
Subject to any restrictions under the export control regulations of
the United States or any other applicable restrictions, LICENSOR will
promptly after the Effective Date, furnish to LICENSEE copies of all
programs constituting the Licensed Copyrighted Works in the form of object
code (machine readable code). Alternatively, LICENSEE may obtain such
Licensed Copyrighted Works in conjunction with its purchase of integrated
circuits or other Licensed Implementations. LICENSEE agrees to use such
programs only for the purpose of programming general purpose DSP devices,
read only memories (ROMs), random access memories (RAMs), or the like,
forming an integral part of Licensed Products and constituting spare parts
solely for the repair of a Licensed Products. LICENSEE agrees (1) it will
not otherwise reproduce Licensed Copyrighted Works, in whole or in part,
(2) it will not prepare derivative works from Copyrighted Works, and (3) it
will not disclose the Licensed Copyrighted Works, in whole or in part.
LICENSEE further agrees that it will not decompile or otherwise reverse
engineer the object code constituting the Licensed Copyrighted Works, or
any portion thereof.
10
<PAGE>
Upon termination of this Agreement, LICENSEE shall promptly return to
LICENSOR, at LICENSEE's expense, all documents and things supplied to
LICENSEE as Licensed Copyrighted Works, as well as all copies and
reproductions thereof, except those incorporated into Licensed Products.
Section 3.09 - License Notice
-----------------------------
On all Licensed Products, LICENSEE shall acknowledge that the Licensed
Products are manufactured under license from LICENSOR. Unless otherwise
from time to time agreed between the parties, the following notice shall be
used by LICENSEE on an exposed surface, such as the back or the bottom, of
all Licensed Products: "Manufactured under license from Dolby
Laboratories". Such notice shall also be used in all instruction and
servicing manuals unless such acknowledgment is clearly and unambiguously
given in the course of any textual descriptions or explanations.
Section 3.10 - Furnishing of Know-How
-------------------------------------
Subject to any restrictions under the export control regulations of
the United States or any other applicable restrictions, LICENSOR will
promptly after the Effective Date, furnish to LICENSEE:
(1) copies of all documents and things comprising the Know-How; and
(2) when requested by LICENSEE, provide, as LICENSOR deems reasonable,
consulting services regarding design considerations and general advice
relating to the Licensed Products and the sale and use thereof, for all of
which LICENSEE will reimburse LICENSOR for travel and reasonable per diem
expenses.
Section 3.11 - Use of Know-How and Confidential Information
-----------------------------------------------------------
3.11(1) - By LICENSEE
---------------------
LICENSEE shall use all Know-How and Confidential Information obtained
heretofore or hereafter from LICENSOR solely for the purpose of
manufacturing and selling Licensed Products under this Agreement, shall not
use such Know-How or Confidential Information in an unauthorized way, and
shall not divulge such Know-How or Confidential Information or any portion
thereof to third parties, unless such Know-How or Confidential Information
(a) was known to LICENSEE prior to its obtaining the same from LICENSOR;
(b) becomes known to LICENSEE from sources other than either directly or
indirectly from LICENSOR; (c) becomes public knowledge other than by breach
of this Agreement by LICENSEE or by another licensee of LICENSOR; or (d) is
independently developed by LICENSEE.
Upon termination of this Agreement, with respect to Know-How or
Confidential Information subject to the obligations of this subsection
3.11(1), LICENSEE shall promptly return to LICENSOR, at LICENSEE's expense,
all documents and things supplied to LICENSEE as Know-How, as well as all
copies and reproductions thereof.
11
<PAGE>
3.11(2) - By LICENSOR
LICENSOR hereby agrees that throughout the term of this Agreement it
shall not divulge to third parties, nor use in any unauthorized way
Confidential Information belonging to LICENSEE, unless such information (a)
was known to LICENSOR prior to its obtaining the same from LICENSEE; (b)
becomes known to LICENSOR from sources other than either directly or
indirectly from LICENSEE; or (c) becomes public knowledge other than by
breach of this Agreement by LICENSOR; or (d) is independently developed by
LICENSOR. The obligations of this subsection 3.11(2) shall cease three (3)
years from the date on which such Know-How or Confidential Information are
acquired by LICENSOR from LICENSEE under this Agreement.
ARTICLE IV
PAYMENTS
--------
Section 4.01 - Initial Payment
------------------------------
LICENSEE shall promptly upon the Effective Date of this Agreement pay
LICENSOR the sum specified on the title page and shall pay all local fees,
taxes, duties, or charges of any kind and shall not deduct them from the
royalties due.
Section 4.02 - Royalties
------------------------
Subject to the provisions of Section 4.05, LICENSEE shall pay to
LICENSOR royalties on Licensed Devices manufactured by or for LICENSEE and
incorporated in Licensed Products which are used, sold, leased, or
otherwise disposed of by LICENSEE, except for Licensed Devices incorporated
in Licensed Products returned to LICENSEE by customers of LICENSEE, other
than in exchange for an upgraded product, on which a credit has been
allowed by LICENSEE to said customers. The royalty payable shall be based
on the number of Licensed Devices, hereinbefore defined, contained in
Licensed Products, which are used, sold, leased or otherwise disposed of by
LICENSEE in successive calendar quarters from the effective date hereof,
according to the amount of royalty specified below:
Number of Licensed Devices
Disposed of in Quarter Royalty Payable
---------------------- ---------------
* *
For every Licensed Device incorporated in a Licensed Product that is
used, sold, leased or otherwise disposed of by LICENSEE in a country that
is not a Non-Patent Country LICENSEE shall pay an additional * per Licensed
Device, up to a maximum of three Licensed Devices per Licensed Product.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
12
<PAGE>
On the Effective Date of this Agreement, and annually thereafter on
first day of each calendar year, the rate at which the royalties are
calculated shall be adjusted in accordance with the Consumer Price Index.
The adjustment shall be made by multiplying the royalties calculated as
specified above by the ratio between the Consumer Price Index for the last
month of the year preceding the year in which the adjustment takes place
and the Consumer Price Index for the month of December 1993. LICENSOR
will, during the first quarter of each calendar year, or as soon as such
information is known, if later, inform LICENSEE of the adjustment ratio to
be applied to royalties due in that year. The first adjustment to royalty
rates shall be made in the quarter commencing January 1, 1995.
Section 4.03 - Section Deleted
------------------------------
Section 4.04 - Royalty Applicability
------------------------------------
A Licensed Product shall be considered sold under Section 4.02 when
invoiced, or if not invoiced, delivered to another by LICENSEE or otherwise
disposed of or put into use by LICENSEE, except for consignment shipments,
which will be considered sold when the payment for such shipments is agreed
upon between LICENSEE and customer.
Section 4.05 - Royalty Payments and Statements
----------------------------------------------
LICENSEE shall render statements and royalty payments as follows:
(1) LICENSEE shall deliver to the address shown on the cover sheet of
this Agreement or such place as LICENSOR may from time to time designate,
quarterly reports certified by LICENSEE's chief financial officer or the
officer's designate within 30 days after each calendar quarter ending with
the last day of March, June, September and December. Alternatively, such
reports may be delivered by facsimile by transmitting them to LICENSOR's
facsimile telephone number shown on the cover sheet of this Agreement or
such other number as LICENSOR may from time to time designate. Royalty
payments are due for each quarter at the same time as each quarterly report
and shall be made by wire transfer in United States funds to LICENSOR's
bank as identified on the cover sheet of this Agreement or such other bank
as LICENSOR may from time to time designate. LICENSEE shall pay all local
fees, taxes, duties, or charges of any kind and shall not deduct them from
the royalties due unless such deductions may be offset against LICENSOR's
own tax liabilities.
Each quarterly report shall:
(a) state the number of each model type of Licensed Products leased,
sold, or otherwise disposed of by LICENSEE during the calendar quarter with
respect to which the report is due;
(b) state the number of Licensed Devices in each model type of
Licensed Product; and
13
<PAGE>
(c) contain such other information and be in such form as LICENSOR or
its outside auditors may prescribe. If LICENSEE claims less than full
product royalty (under Section 4.06) or no royalty due (under Section
6.03), LICENSEE shall specify the country in which such Licensed Products
were made, the country in which such Licensed Products were sold, and the
identity of the purchasers of such Licensed Products.
(2) Any remittance in excess of royalties due with respect to the
calendar quarter for which the report is due shall be applied by LICENSOR
to the next payment due.
(3) LICENSEE's first report shall be for the calendar quarter in which
LICENSEE sells its first Licensed Product.
(4) LICENSEE shall deliver a final report and payment of royalties to
LICENSOR certified by LICENSEE's chief financial officer or the officer's
designate within 30 days after termination of this Agreement throughout the
world. Such a final report shall include a report of all royalties due
with respect to Licensed Products not previously reported to LICENSOR.
Such final report shall be supplemented at the end of the next and
subsequent quarters, in the same manner as provided for during the Life of
the Agreement, in the event that LICENSEE learns of any additional
royalties due.
(5) LICENSEE shall pay interest to LICENSOR from the due date to the
date payment is made of any overdue royalties or fees, including the
Initial Payment, at the rate of 2% above the prime rate as is in effect
from time to time at the bank identified on the cover page of this
Agreement, or another major bank agreed to by the LICENSOR and LICENSEE in
the event that the identified bank should cease to exist, provided however,
that if the interest rate thus determined is in excess of rates allowable
by any applicable law, the maximum interest rate allowable by such law
shall apply.
Section 4.06 - Royalties in Non-Patent Country
----------------------------------------------
If a Licensed Product is manufactured in a Non-Patent Country and
used, sold, leased or otherwise disposed of in a Non-Patent Country, be it
the same or a different Non-Patent Country, royalties for the manufacture,
use, sale, lease or other disposal of the Licensed Products in such Non-
Patent Country or Countries under the Know-How, Licensed Copyrighted Works,
and the Licensed Trademarks license shall be payable at the rates specified
in Section 4.02; however, the additional royalty of * on each Licensed
Device of such Licensed Product specified in Section 4.02 shall be waived.
This provision shall not apply and full royalties shall be payable under
Section 4.02:
(1) when Licensed Products are manufactured in any country which is
not a Non-Patent Country or are used, sold, leased or otherwise disposed of
in any country which is not a Non-Patent Country, be it the same country as
the country of manufacture or a different country; or
(2) when LICENSEE knows or has reason to know that the Licensed
Products manufactured in a Non-Patent Country and used, sold, leased or
otherwise disposed of in a Non-Patent Country are destined for use by
consumers or for sale, lease or other
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
14
<PAGE>
disposal to consumers in a country which is not a Non- Patent Country and
LICENSOR deems such sale to be for the purpose of defeating the royalty
provisions of this agreement.
Section 4.07 - Books and Records
--------------------------------
LICENSEE shall keep complete books and records of all sales, leases,
uses, returns, or other disposals by LICENSEE of Licensed Products for a
period of three (3) years from such sales, leases, uses or other disposals.
Section 4.08 - Rights of Inspecting Books and Records
-----------------------------------------------------
LICENSOR shall have the right, through a professionally registered
accountant at LICENSOR's expense, to inspect, examine and make abstracts of
the said books and records insofar as may be necessary to verify the
accuracy of the same and of the statements provided for herein but such
inspection and examination shall be made during business hours upon
reasonable notice and not more often than once per calendar year. LICENSOR
agrees not to divulge to third parties any Confidential Information
obtained from the books and records of LICENSEE as a result of such
inspection unless such information (a) was known to LICENSOR prior to its
acquisition by LICENSOR as a result of such inspection; (b) becomes known
to LICENSOR from sources other than directly or indirectly from LICENSEE;
or (c) becomes a matter of public knowledge other than by breach of this
Agreement by LICENSOR.
ARTICLE V
STANDARDS OF MANUFACTURE AND QUALITY
------------------------------------
Section 5.01 - Standardization and Quality
------------------------------------------
LICENSEE shall abide by the Dolby Digital AC-3 Audio System
Specifications, hereto appended in Appendix 8 and as modified from time to
time by LICENSOR. LICENSEE shall abide by reasonable standards of quality
and workmanship. Such quality standards shall apply to Licensed Devices
and to aspects of Licensed Products not directly relating to the Licensed
Devices but which nevertheless influence or reflect upon the audio quality
or performance of the Licensed Devices as perceived by the end user.
LICENSEE shall with respect to all Licensed Products bearing the Licensed
Trademarks conform to any reasonable quality standards requirements as
specified by LICENSOR within a period of ninety (90) days of such
specification in writing.
Licensed Products shall not be designed, presented or advertised in
any way which contributes to confusion of the Dolby Digital AC-3 audio
system with any of LICENSOR's other digital audio systems, audio noise
reduction or headroom extension systems or LICENSOR'S motion picture sound
system.
Section 5.02 - Right to Inspect Quality
---------------------------------------
15
<PAGE>
LICENSEE shall provide LICENSOR with such non-confidential information
concerning Licensed Products as it may reasonably require in performing its
right to enforce quality standards under this Agreement. LICENSEE will,
upon request, provide on a loan basis to LICENSOR a reasonable number of
samples (at least one from each product family) of Licensed Products for
testing, together with instruction and service manuals. If transmissions
necessary to test Licensed Products under field operating conditions are
not receivable at LICENSOR's San Francisco test facility, LICENSEE shall
make available to LICENSOR, upon receipt of reasonable notice from
LICENSOR, reasonable facilities for testing Licensed Products. In the
event that LICENSOR shall complain that any Licensed Product does not
comply with LICENSOR's quality standards, excepting newly specified
standards falling within the ninety (90) day time limit of Section 5.01, it
shall promptly so notify LICENSEE by written communication whereupon
LICENSEE shall within ninety (90) days suspend the lease, sale or other
disposal of the same.
ARTICLE VI
TERMINATION AND EFFECT OF TERMINATION
-------------------------------------
Section 6.01 - Expiration of Agreement
--------------------------------------
Unless this Agreement already has been terminated in accordance with
the provisions of Section 6.02, this Agreement shall terminate in all
countries of the world upon the expiration of the last-to-expire Patent
under the Scheduled Patents. The Agreement is not extended by Patents in
the Patent Rights that are not Scheduled Patents.
Section 6.02 - Termination for Cause
------------------------------------
At the option of LICENSOR, in the event that LICENSEE breaches any of
its material obligations under this Agreement, subject to the conditions of
Section 6.04, this Agreement shall terminate upon LICENSOR's giving sixty
(60) days advance notice in writing, effective on dispatch of such notice,
of such termination, giving reasons therefor to LICENSEE, provided however,
that, if LICENSEE, within the sixty (60) day period, remedies the failure
or default upon which such notice is based, then such notice shall not
become effective and this Agreement shall continue in full force and
effect. Notwithstanding the sixty day cure period provided under the
provisions of this Section 6.02, interest due under Section 4.05 shall
remain payable and shall not waive, diminish, or otherwise affect any of
LICENSOR's rights pursuant to this Section 6.02.
Section 6.03 - Option to Terminate in a Non-Patent Country
----------------------------------------------------------
Subject to the provisions of Section 6.04, unless this Agreement
already has been terminated in accordance with the provisions of Section
6.01 or Section 6.02, LICENSEE shall have the option to terminate its
license under this Agreement with respect to a Non-Patent Country at any
time after three years from the Effective Date of this Agreement. Said
option to terminate with respect to such country shall be effective when
LICENSOR receives LICENSEE's written notice of its exercise of such option
and shall be prospective only and not retroactive.
16
<PAGE>
Section 6.04 - Effect of Termination
------------------------------------
Upon termination of the Agreement, as provided in Sections 6.01 or
6.02, or upon termination of the license under this Agreement with respect
to a Non-Patent Country in accordance with the option set forth in Section
6.03, with respect to such country only, all licenses granted by LICENSOR
to LICENSEE under this Agreement shall terminate, all rights LICENSOR
granted to LICENSEE shall revest in LICENSOR, and all other rights and
obligations of LICENSOR and LICENSEE under this agreement shall terminate
except that the following rights and obligations of LICENSOR and LICENSEE
shall survive to the extent necessary to permit their complete fulfillment
and discharge, with the exception that subsection (9) shall not apply in
case of termination under Section 6.01:
(1) LICENSEE's obligation to deliver a final royalty report and
supplements thereto as required by Section 4.05;
(2) LICENSOR's right to receive and LICENSEE's obligation to pay
royalties, under Article IV, including interest on overdue royalties,
accrued or accruable for payment at the time of termination and interest on
overdue royalties accruing subsequent to termination;
(3) LICENSEE's obligation to maintain books and records and LICENSOR's
right to examine, audit, and copy as provided in Section 4.07;
(4) any cause of action or claim of either party accrued or to accrue
because of any breach or default by the other party;
(5) LICENSEE's obligations with respect to Know-How and Confidential
Information under Section 3.11(1) and LICENSOR's obligations with respect
to Confidential Information under Sections 3.11(2) and 4.08;
(6) LICENSEE's obligations to cooperate with LICENSOR with respect to
Patent, Trademark, and Copyright enforcement under Section 3.04, with
respect to matters arising before termination;
(7) LICENSEE's obligation to return to LICENSOR all documents and
things furnished to LICENSEE, and copies thereof, under the provisions of
Section 3.11;
(8) LICENSEE's and LICENSOR's obligations regarding public
announcements under Section 8.03; and
(9) LICENSEE shall be entitled to fill orders for Licensed Products
already received and to make or have made for it and to sell Licensed
Products for which commitments to vendors have been made at the time of
such termination, subject to payment of applicable royalties thereon and
subject to said Licensed Products meeting LICENSOR's quality standards,
provided that LICENSEE promptly advises LICENSOR of such commitments upon
termination; and
17
<PAGE>
(10) LICENSEE's right to use the Know-How and to reproduce the
Licensed Copyrighted Works in connection with the manufacture, use, lease,
and sale of spare parts solely for the repair of Licensed Products as
provided in Section 2.01(3).
The portions of the Agreement specifically identified in the sub-parts
of this Section shall be construed and interpreted in connection with such
other portions of the Agreement as may be required to make them effective.
ARTICLE VII
LIMITATIONS OF RIGHTS AND AUTHORITY
-----------------------------------
Section 7.01 - Limitation of Rights
-----------------------------------
No right or title whatsoever in the Patent Rights, Know-How, Licensed
Copyrighted Works, or the Licensed Trademarks is granted by LICENSOR to
LICENSEE or shall be taken or assumed by LICENSEE except as is specifically
laid down in this Agreement.
Section 7.02 - Limitation of Authority
--------------------------------------
Neither party shall in any respect whatsoever be taken to be the agent
or representative of the other party and neither party shall have any
authority to assume any obligation for or to commit the other party in any
way.
Section 7.03 - Disclaimer of Warranties and Liability: Hold Harmless
--------------------------------------------------------------------
LICENSOR has provided LICENSEE the rights and privileges contained in
this Agreement in good faith. LICENSOR represents that it has done
diligent U.S. patentability searches in the field of digital audio and that
it is unaware of any patents of third parties which would be infringed by
the practice of its AC-3 digital audio technology which is the subject of
this Agreement. LICENSOR represents that the Licensed Know-How and
Licensed Copyrighted Works were either developed by LICENSOR or by a third
party from whom LICENSOR has obtained the right to license. However,
nothing contained in this Agreement shall be construed as (1) a warranty or
representation by LICENSOR as to the validity or scope of any Patent
included in The Patent Rights; (2) a warranty or representation that the
Dolby Digital AC-3 Audio System technology, Patent Rights, Know-How,
Licensed Copyrighted Works, Licensed Trademarks, or any Licensed Device,
Licensed Product, or part thereof embodying any of them will be free from
infringement of Patents, copyrights, trademarks, service marks, or other
proprietary rights of third parties; or (3) an agreement to defend LICENSEE
against actions or suits of any nature brought by any third parties.
LICENSOR disclaims all liability and responsibility for property
damage, personal injury, and consequential damages, whether or not
foreseeable, that may result from the manufacture, use, lease, or sale of
Licensed Devices, Licensed Products and parts thereof, and LICENSEE agrees
to assume all liability and responsibility for all such
18
<PAGE>
damage and injury, to the extent that such liability and responsibility of
LICENSEE have been finally determined in any court of competent
jurisdiction.
LICENSEE agrees to indemnify, defend, and hold LICENSOR harmless from
and against all claims (including, without limitation, product liability
claims), suits, losses and damages, including reasonable attorneys' fees
and any other expenses incurred in investigation and defense, arising out
of LICENSEE's manufacture, use, lease, or sale of Licensed Devices,
Licensed Products, or parts thereof, or out of any allegedly unauthorized
use of any trademark, service mark, Patent, copyright, process, idea,
method, or device (excepting Licensed Trademarks, Patent Rights, Know-How,
Confidential Information, and Licensed Copyrighted Works) by LICENSEE or
those acting under its apparent or actual authority.
Section 7.04 - Limitation of Assignment by LICENSEE
---------------------------------------------------
The rights, duties and privileges of LICENSEE hereunder shall not be
transferred or assigned by it either in part or in whole without prior
written consent of LICENSOR. However, LICENSEE shall have the right to
transfer its rights, duties and privileges under this Agreement in
connection with its merger and consolidation with another firm or the sale
of its entire business to another person or firm, provided that such person
or firm shall first have agreed with LICENSOR to perform the transferring
party's obligations and duties hereunder.
Section 7.05 - Compliance with U.S. Export Control Regulations
--------------------------------------------------------------
(1) LICENSEE agrees not to export any technical data acquired from
LICENSOR under this Agreement, nor the direct product thereof, either
directly or indirectly, to any country in contravention of United States
law.
(2) Nothing in this Agreement shall be construed as requiring LICENSOR
to export from the United States, directly or indirectly, any technical
data or any commodities to any country in contravention of United States
law.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
Section 8.01 - Language of Agreement: Language of Notices
---------------------------------------------------------
The language of this Agreement is English. If translated into another
language, this English version of the Agreement shall be controlling.
Except as may be agreed by LICENSOR and LICENSEE, all notices, reports,
consents, and approvals required or permitted to be given hereunder shall
be written in the English language.
Section 8.02 - Stability of Agreement
-------------------------------------
No provision of this Agreement shall be deemed modified by any acts of
LICENSOR, its agents or employees or by failure to object to any acts of
LICENSEE
19
<PAGE>
which may be inconsistent herewith, or otherwise, except by a subsequent
agreement in writing signed by LICENSOR and LICENSEE. No waiver of a breach
committed by either party in one instance shall constitute a waiver or a
license to commit or continue breaches in other or like instances.
Section 8.03 - Public Announcements
-----------------------------------
Neither party shall at any time heretofore or hereafter publicly state
or imply that the terms specified herein or the relationships between
LICENSOR and LICENSEE are in any way different from those specifically laid
down in this Agreement. LICENSEE shall not at any time publicly state or
imply that any unlicensed products use the Dolby Digital AC-3 Audio System
Specifications. If requested by one party, the other party shall promptly
supply the first party with copies of all public statements and of all
publicity and promotional material relating to this Agreement, the Dolby
Digital AC-3 Audio System Specifications, Licensed Devices, Licensed
Products, Licensed Trademarks, and Know-How.
Section 8.04 - Address of LICENSOR and LICENSEE for all Other
-------------------------------------------------------------
Communications
--------------
Except as otherwise specified in this Agreement, all notices, reports,
consents, and approvals required or permitted to be given hereunder shall
be in writing, signed by an officer of LICENSEE or LICENSOR, respectively,
and sent postage or shipping charges prepaid by certified or registered
mail, return receipt requested showing to whom, when and where delivered,
or by Express mail, or by a secure overnight or one-day delivery service
that provides proof and date of delivery, or by facsimile, properly
addressed or transmitted to LICENSEE or LICENSOR, respectively, at the
address or facsimile number set forth on the cover page of this Agreement
or to such other address or facsimile number as may from time to time be
designated by either party to the other in writing. Wire payments from
LICENSEE to LICENSOR shall be made to the bank and account of LICENSOR as
set forth on the cover page of this agreement or to such other bank and
account as LICENSOR may from time to time designate in writing to LICENSEE.
Section 8.05 - Applicable Law
-----------------------------
This Agreement shall be construed in accordance with the substantive
laws, but not the choice of law rules, of the State of California.
Section 8.06 - Choice of Forum: Attorneys' Fees
-----------------------------------------------
To the full extent permitted by law, LICENSOR and LICENSEE agree that
their choice of forum, in the event that any dispute arising under this
agreement is not resolved by mutual agreement, shall be the United States
Courts in the State of California and the State Courts of the State of
California.
In the event that any action is brought for any breach or default of
any of the terms of this Agreement, or otherwise in connection with this
Agreement, the prevailing
20
<PAGE>
party shall be entitled to recover from the other party all costs and
expenses incurred in that action or any appeal therefrom, including without
limitation, all attorneys' fees and costs actually incurred.
Section 8.07 - Construction of Agreement
----------------------------------------
This Agreement shall not be construed for or against any party based
on any rule of construction concerning who prepared the Agreement or
otherwise.
Section 8.08 - Captions
-----------------------
Titles and captions in this Agreement are for convenient reference
only and shall not be considered in construing the intent, meaning, or
scope of the Agreement or any portion thereof.
Section 8.09 - Singular and Plural
----------------------------------
Throughout this Agreement, words in the singular shall be construed as
including the plural and words in the plural shall be construed as
including the singular.
Section 8.10 - Complete Agreement
---------------------------------
This Agreement contains the entire agreement and understanding between
LICENSOR and LICENSEE relating to the subject matter hereof and merges all
prior or contemporaneous oral or written communication between them.
Neither LICENSOR nor LICENSEE now is, or shall hereafter be, in any way
bound by any prior, contemporaneous or subsequent oral or written
communication except insofar as the same is expressly set forth in this
Agreement or in a subsequent written agreement duly executed by both
LICENSOR and LICENSEE.
Section 8.11 - Severability
---------------------------
Should any portion of this Agreement be declared null and void by
operation of law, or otherwise, the remainder of this Agreement shall
remain in full force and effect.
Section 8.12 - Company Representation and Warranty
--------------------------------------------------
LICENSEE represents and warrants to LICENSOR that it is not a party to
any agreement, and is not subject to any statutory or other obligation or
restriction, which might prevent or restrict it from performing all of its
obligations and undertakings under this License Agreement, and that the
execution and delivery of this Agreement and the performance by LICENSEE of
its obligations hereunder have been authorized by all necessary action,
corporate or otherwise.
Section 8.13 - Execution
------------------------
IN WITNESS WHEREOF, the said LICENSOR has caused this Agreement to be
executed on the cover page of this Agreement, in the presence of a witness,
by an officer
21
<PAGE>
duly authorized and the said LICENSEE has caused the same to be executed on
the cover page of this Agreement, in the presence of a witness, by an
officer duly authorized, in duplicate original copies, as of the date set
forth on said cover page.
22
<PAGE>
EXHIBIT 10.10
LIBERTY
-------
PROPERTY TRUST
AGREEMENT OF LEASE
BETWEEN
LIBERTY PROPERTY
LIMITED PARTNERSHIP
("LANDLORD")
AND
QUADRANT INTERNATIONAL, INC.
("TENANT")
FOR
1 GREAT VALLEY PARKWAY, SUITE 2
MALVERN, PENNSYLVANIA 19355
<PAGE>
LEASE AGREEMENT
(Multi-Tenant Industrial)
<TABLE>
<CAPTION>
INDEX PAGE
- ----- -----
<S> <C>
(S) SECTION
-------
1. Summary of Terms and Certain Definitions.................................................. 1
2. Premises.................................................................................. 2
3. Acceptance of Premises.................................................................... 2
4. Use; Compliance........................................................................... 2
5. Term...................................................................................... 2
6. Minimum Annual Rent....................................................................... 3
7. Operation of Property; Payment of Expenses................................................ 3
8. Signs..................................................................................... 4
9. Alterations and Fixtures.................................................................. 5
10. Mechanics' Liens.......................................................................... 5
11. Landlord's Right of Entry................................................................. 5
12. Damage by Fire or Other Casualty.......................................................... 5
13. Condemnation.............................................................................. 6
14. Non-Abatement of Rent..................................................................... 6
15. Indemnification of Landlord............................................................... 6
16. Waiver of Claims.......................................................................... 6
17. Quiet Enjoyment........................................................................... 6
18. Assignment and Subletting................................................................. 6
19. Subordination; Mortgagee's Rights......................................................... 7
20. Recording; Tenant's Certificate........................................................... 7
21. Surrender; Abandoned Property............................................................. 8
22. Curing Tenant's Defaults.................................................................. 8
23. Defaults - Remedies....................................................................... 8
24. Representations of Tenant................................................................. 9
25. Liability of Landlord..................................................................... 9
26. Interpretation; Definitions............................................................... 10
27. Notices................................................................................... 10
28. Security Deposit.......................................................................... 11
RIDER
29. PA Additional Remedies.................................................................... R-1
30. Tenant Improvements....................................................................... R-2
31. Amendment to Article 3 Entitled "Acceptance of Premises".................................. R-2
32. Amendment to Article 4 Entitled "Use; Compliance"......................................... R-2
33. Amendment to Article 6 Entitled: "Minimum Annual Rent".................................... R-3
34. Amendment to Article 7 Entitled "Operation of Property; Payment of Expenses".............. R-3
35. Amendment to Article 8 Entitled "Signs"................................................... R-6
36. Amendment to Article 9 Entitled "Alterations and Fixtures"................................ R-6
</TABLE>
<PAGE>
<TABLE>
<S> <C>
37. Amendment to Article 10 Entitled "Mechanics Liens"........................................ R-6
38. Amendment to Article 12 Entitled "Damage by Fire or Other Casualty"....................... R-6
39. Amendment to Article 13 Entitled "Condemnation"........................................... R-7
40. Amendment to Article 18 Entitled "Assignment and Subletting".............................. R-7
41. Amendment to Article 9 Entitled "Subordination; Mortgagee's Rights"....................... R-7
42. Amendment to Article 20 Entitled "Tenant Certificate"..................................... R-7
43. Amendment to Article 23 Entitled "Defaults - Remedies".................................... R-7
44. Amendment to Article 23 (f)............................................................... R-7
45. Amendment to Article 25 Entitled "Liability of Landlord".................................. R-8
46. Landlord's Indemnification of Tenant...................................................... R-8
</TABLE>
2
<PAGE>
THIS LEASE AGREEMENT is made by and between LIBERTY PROPERTY LIMITED
PARTNERSHIP, a Pennsylvania limited partnership ("LANDLORD") with its address at
65 Valley Stream Parkway, Suite 100, Malvern, Pennsylvania 19355 and QUADRANT
INTERNATIONAL, INC., a corporation organized under the laws of Pennsylvania
("TENANT") with its address at 269 Great Valley Parkway, Malvern, Pennsylvania
19355, and is dated as of the date on which this lease has been fully executed
by Landlord and Tenant.
1. SUMMARY OF TERMS AND CERTAIN DEFINITIONS.
-----------------------------------------
(a) "PREMISES" Rentable square feet: 11,812
(Section 2) Suite: 2
(b) "BUILDING": Rentable square feet: 60,880
((S)2) Address: 1 Great Valley Parkway
Malvern, PA 19355
(c) "TERM": Sixty-one (61) months.
((S)5)
(i) "COMMENCEMENT DATE": August 1, 1998, on the
initial 6,887 square feet; and September 1, 1998,
on the remaining 4,925 square feet.
(ii) "EXPIRATION DATE": See Section 5.
(d) MINIMUM RENT ((S)6) AND OPERATING EXPENSES ((S)7)
(i) "MINIMUM ANNUAL RENT"
Period Annual Monthly
------ ------ -------
8/1/98-8/31/98 -- $ 6,600.04
9/1/98-8/31/98 135,838.00 11,319.83
9/1/99-8/31/00 139,813.14 11,659.43
9/1/00-8/31/01 144,110.53 12,009.21
9/1/01-8/31/02 148,433.85 12,369.49
9/1/02-8/31/03 152,886.87 12,740.57
(ii) ESTIMATED "ANNUAL OPERATING EXPENSES Payable in a monthly
installment of $1,762.15 (One Thousand Seven Hundred Sixty-two and 15/100
Dollars) for the month of August 1998.
Then, beginning September 1, 1998, increasing to $36,267.56 (Thirty-
six Thousand Two Hundred Sixty-seven and 56/100 Dollars) payable in monthly
installments of $3,022.30 (Three Thousand Twenty-two and 30/100 Dollars),
subject to adjustment ((S)7(a)).
<PAGE>
(e) "PROPORTIONATE SHARE" ((S)7(a)): 19.40% beginning September 1,
1998 (Ratio of rentable square feet in the Premises to rentable
square feet in the Building)
(f) "USE" ((S)4): General office and warehouse.
(g) "SECURITY DEPOSIT" ((S)28): $11,800.00 (Eleven thousand Eight
Hundred and 00/100 Dollars). Tenant currently has $2,723.00 on
account with Landlord.
(h) CONTENTS: This lease consists of the Index, pages 1 through 11
containing Sections 1 through 28 and the following, all of which
are attached hereto and made a part of this lease:
Riders with Sections 29-46.
Exhibits:
"A" - Plan showing Premises
"B" - Commencement Certificate Form
"C" - Building Rules
"D" - Estoppel Certificate Form
2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from
--------
Landlord the Premises as shown on attached Exhibit "A" within the Building (the
Building and the lot on which it is located, the "PROPERTY"), together with the
nonexclusive right with Landlord and other occupants of the Building to use all
areas and facilities provided by Landlord for the use of all tenants in the
Property including any driveways, sidewalks and parking, loading and landscaped
areas (the "COMMON AREAS").
3. ACCEPTANCE OF PREMISES. Tenant has examined and knows the condition of the
----------------------
Property, the zoning, streets, sidewalks, parking areas, curbs and access ways
adjoining it, visible easements, any surface conditions and the present uses,
and Tenant accepts them in the condition in which they now are, without relying
on any representation, covenant or warranty by Landlord. Tenant and its agents
shall have the right, at Tenant's own risk, expense and responsibility, at all
reasonable times prior to the Commencement Date, to enter the Premises for the
purpose of taking measurements and installing its furnishings and equipment;
provided that the Premises are vacant and Tenant obtains Landlord's prior
written consent.
4. USE; COMPLIANCE.
---------------
(a) PERMITTED USE. Tenant shall occupy and use the Premises for and only for
the Use specified in Section l(f) above and in such a manner as is lawful,
reputable and will not create any nuisance or otherwise interfere with any other
tenant's normal operations or the management of the Building. Without limiting
the foregoing, such Use shall exclude any use that would cause the Premises or
the Property to be deemed a "place of public accommodation" under the Americans
with Disabilities Act (the "ADA") as further described in the Building Rules
(defined below). All Common Areas shall be subject to Landlord's exclusive
control and management at all times. Tenant shall not use or permit the use of
any portion of the Property
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for outdoor storage or installations outside of the Premises nor for any use
that would interfere with any other person's use of any portion of the Property
outside of the Premises.
(b) COMPLIANCE. Landlord represents that, as of the date of this lease,
there is no action required with respect to the Premises or Common Areas under
any laws (including Title III of the ADA), ordinances, notices, orders, rules,
regulations and requirements applicable to the Premises or to the Common Areas.
From and after the Commencement Date, Tenant shall comply promptly, at its sole
expense, (including making any alterations or improvements) with all laws
(including the ADA), ordinances, notices, orders, rules, regulations and
requirements regulating the Property during the Term which impose any duty upon
Landlord or Tenant with respect to Tenant's use, occupancy or alteration of, or
Tenant's installations in or upon, the Property including the Premises, (as the
same may be amended, the "LAWS AND REQUIREMENTS") and the building rules
attached as Exhibit "C", as amended by Landlord from time to time (the "BUILDING
RULES"). Provided, however, that Tenant shall not be required to comply with
the Laws and Requirements with respect to the footings, foundations, structural
steel columns and girders forming a part of the Property unless the need for
such compliance arises out of Tenant's use, occupancy or alteration of the
Property, or by any act or omission of Tenant or any employees, agents,
contractors, licensees or invitees ("AGENTS") of Tenant. With respect to
Tenant's obligations as to the Property, other than the Premises, at Landlord's
option and at Tenant's expense, Landlord may comply with any repair, replacement
or other construction requirements of the Laws and Requirements and Tenant shall
pay to Landlord all costs thereof as additional rent.
(c) ENVIRONMENTAL. Tenant shall comply, at its sole expense, with all Laws
and Requirements as set forth above, all manufacturers' instructions and all
requirements of insurers relating to the treatment, production, storage,
handling, transfer, processing, transporting, use, disposal and release of
hazardous substances, hazardous mixtures, chemicals, pollutants, petroleum
products, toxic or radioactive matter (the "RESTRICTED ACTIVITIES"). Tenant
shall deliver to Landlord copies of all Material Safety Data Sheets or other
written information prepared by manufacturers, importers or suppliers of any
chemical and all notices, filings, permits and any other written communications
from or to Tenant and any entity regulating any Restricted Activities.
(d) NOTICE. If at any time during or after the Term, Tenant becomes aware
of any inquiry, investigation or proceeding regarding the Restricted Activities
or becomes aware of any claims, actions or investigations regarding the ADA,
Tenant shall give Landlord written notice, within 5 days after first learning
thereof, providing all available information and copies of any notices.
5. TERM. The Term of this lease shall commence on the Commencement Date and
----
shall end at 11:59 p.m. on the last day of the Term (the "EXPIRATION DATE"),
without the necessity for notice from either party, unless sooner terminated in
accordance with the terms hereof. At Landlord's request, Tenant shall confirm
the Commencement Date and Expiration Date by executing a lease commencement
certificate in the form attached as Exhibit "B".
6. MINIMUM ANNUAL RENT. Tenant agrees to pay to Landlord the Minimum Annual
-------------------
Rent in equal monthly installments in the amount set forth in Section 1(d) (as
increased at the
3
<PAGE>
beginning of each lease year as set forth in Section l(d)), in advance, on the
first date of each calendar month during the Term, without notice, demand or
setoff, at Landlord's address designated at the beginning of this lease unless
Landlord designates otherwise; provided that rent for the first full month shall
be paid at the signing of this lease. If the Commencement Date falls on a day
other than the first day of a calendar month, the rent shall be apportioned pro
rata on a per diem basis for the period from the Commencement Date until the
first day of the following calendar month and shall be paid on or before the
Commencement Date. As used in this lease, the term "LEASE YEAR" means the period
from the Commencement Date through the succeeding 12 full calendar months
(including for the first lease year any partial month from the Commencement Date
until the first day of the first full calendar month) and each successive 12
month period thereafter during the Term.
7. OPERATION OF PROPERTY; PAYMENT OF EXPENSES.
------------------------------------------
(a) PAYMENT OF OPERATING EXPENSES. Tenant shall pay to Landlord the Annual
Operating Expenses in equal monthly installments in the amount set forth in
Section l(d) (prorated for any partial month), from the Commencement Date and
continuing throughout the Term on the first day of each calendar month during
the Term, as additional rent, without notice, demand or setoff, provided that
the monthly installment for the first full month shall be paid at the signing of
this lease. Landlord shall apply such payments to the operating expenses owed to
Landlord by Tenant pursuant to the following Sections 7(b)-(f). The amount of
the Annual Operating Expenses set forth in Section l(d) represents Tenant's
Proportionate Share of the estimated operating expenses during the first
calendar year of the Term on an annualized basis; from time to time Landlord may
adjust such estimated amount if the estimated operating expenses increase. By
April 30th of each year (and as soon as practical after the expiration or
termination of this lease or at any time in the event of a sale of the
Property), Landlord shall provide Tenant with a statement of the actual amount
of such expenses for the preceding calendar year or part thereof. Landlord or
Tenant shall pay to the other the amount of any deficiency or overpayment then
due from one to the other or, at Landlord's option, Landlord may credit Tenant's
account for any overpayment. Tenant's obligation to pay the Annual Operating
Expenses pursuant to this Section 7 shall survive the expiration or termination
of this lease.
(b) TAXES AND OTHER IMPOSITIONS. Tenant shall pay prior to delinquency all
levies, taxes (including sales taxes and gross receipt taxes), assessments,
liens, license and permit fees, which are applicable to the Term, and which are
imposed by any authority or under any law, ordinance or regulation thereof, or
pursuant to any recorded covenants or agreements, and the reasonable cost of
contesting any of the foregoing (the "IMPOSITIONS") upon or with respect to the
Premises, or any improvements thereto, or directly upon this lease or the Rent
(defined in Section 7(f)) or amounts payable by any subtenants or other
occupants of the Premises, or against Landlord because of Landlord's estate or
interest herein. Accordingly, Tenant shall pay as aforesaid its Proportionate
Share of any Imposition which is not imposed upon the Premises as a separate
entity but which is imposed upon all or part of the Property or upon the leases
or rents relating to the Property.
(i) Nothing herein contained shall be interpreted as requiring Tenant to
pay any income, excess profits or corporate capital stock tax imposed or
assessed upon
4
<PAGE>
Landlord, unless such tax or any similar tax is levied or assessed in lieu
of all or any part of any Imposition or an increase in any Imposition.
(ii) If it shall not be lawful for Tenant to reimburse Landlord for
any of the Impositions, the Minimum Annual Rent shall be increased by the
amount of the portion of such Imposition allocable to Tenant, unless
prohibited by law.
(c) INSURANCE.
(i) PROPERTY. Landlord shall keep in effect, and Tenant shall pay
to Landlord its Proportionate Share of the cost of, insurance against loss
or damage to the Building or the Property by fire and such other casualties
as may be included within fire, extended coverage and special form
insurance covering the full replacement cost of the Building (but excluding
coverage of Tenant's personal property in, and any alterations by Tenant
to, the Premises), and such other insurance as Landlord may reasonably deem
appropriate or as may be required from time-to-time by any mortgagee.
(ii) LIABILITY. Tenant, at its own expense, shall keep in effect
comprehensive general public liability insurance with respect to the
Premises and the Property, including contractual liability insurance, with
such limits of liability for bodily injury (including death) and property
damage as reasonably may be required by Landlord from time-to-time, but not
less than a combined single limit of $1,000,000 per occurrence and a
general aggregate limit of not less than $3,000,000 (which aggregate limit
shall apply separately to each of Tenant's locations if more than the
Premises); however, such limits shall not limit the liability of Tenant
hereunder. The policy of comprehensive general public liability insurance
also shall name Landlord and Landlord's agent as insured parties with
respect to the Premises, shall be written on an "occurrence" basis and not
on a "claims made" basis, shall provide that it is primary with respect to
any policies carried by Landlord and that any coverage carried by Landlord
shall be excess insurance, shall provide that it shall not be cancelable or
reduced without at least 30 days prior written notice to Landlord and shall
be issued in form satisfactory to Landlord. The insurer shall be a
responsible insurance carrier which is authorized to issue such insurance
and licensed to do business in the state in which the Property is located
and which has at all times during the Term a rating of no less than A VII
in the most current edition of Best's Insurance Reports. Tenant shall
deliver to Landlord on or before the Commencement Date, and subsequently
renewals of, a certificate of insurance evidencing such coverage and the
waiver of subrogation described below.
(iii) WAIVER OF SUBROGATION. Landlord and Tenant shall have included
in their respective property insurance policies waivers of their respective
insurers' right of subrogation against the other party. If such a waiver
should be unobtainable or unenforceable, then such policies of insurance
shall state expressly that such policies shall not be invalidated if,
before a casualty, the insured waives the right of recovery against any
party responsible for a casualty covered by the policy.
(iv) INCREASE OF PREMIUMS. Tenant agrees not to do anything or fail
to do anything which will increase the cost of Landlord's insurance or
which will prevent
5
<PAGE>
Landlord from procuring policies (including public liability) from
companies and in a form satisfactory to Landlord. If any breach of the
preceding sentence by Tenant causes the rate of fire or other insurance to
be increased, Tenant shall pay the amount of such increase as additional
rent promptly upon being billed.
(d) REPAIRS AND MAINTENANCE; COMMON AREAS; BUILDING MANAGEMENT. Except
as specifically otherwise provided in this Section (d), Tenant at its sole
expense shall maintain the Premises in good order and condition, promptly make
all repairs necessary to maintain such condition, and repair any damage to the
Premises caused by Tenant or its Agents. All repairs made by Tenant shall
utilize materials and equipment which are comparable to those originally used in
constructing the Building and Premises. When used in this Section (d), the term
"repairs" shall include replacements and renewals when necessary.
(i) Landlord, at its sole expense, shall make all necessary
repairs to the footings, foundations, structural steel columns and girders
forming a part of the Premises, provided that Landlord shall have no
responsibility to make any repair until Landlord receives written notice of
the need for such repair.
(ii) Landlord, at Tenant's sole expense, shall maintain and repair
the HVAC systems appurtenant to the Premises.
(iii) Landlord shall make all necessary repairs to the roof,
exterior portions of the Premises and the Building, utility and
communications lines, equipment and facilities in the Building, which serve
more than one tenant, and to the Common Areas, the cost of which shall be
an operating expense of which Tenant shall pay its Proportionate Share,
provided that Landlord shall have no responsibility to make any repair
until Landlord receives written notice of the need for such repair.
Landlord shall operate and manage the Property and shall maintain all
Common Areas and any paved areas appurtenant to the Property in a clean and
orderly condition. Landlord reserves the right to make alterations to the
Common Areas from time to time. Operating expenses also shall include (A)
all sums expended by Landlord for the supervision, maintenance, repair,
replacement and operation of the Common Areas (including the costs of
utility services), (B) any costs of building improvements made by Landlord
to the Property that are required by any governmental authority or for the
purpose of reducing operating expenses and (C) a management and
administrative fee applicable to the overall operation of the Property.
(iv) Notwithstanding anything herein to the contrary, repairs and
replacements to the Property including the Premises made necessary by
Tenant's use, occupancy or alteration of, or Tenant's installation in or
upon the Property or by any act or omission of Tenant or its Agents shall
be made at the sole expense of Tenant to the extent not covered by any
applicable insurance proceeds paid to Landlord. Tenant shall not bear the
expense of any repairs or replacements to the Property arising out of or
caused by, any other tenant's use, occupancy or alteration of, or any other
tenant's installation in or upon, the Property or by any act or omission of
any other tenant or any other tenant's Agents.
6
<PAGE>
(e) UTILITY CHARGES. Tenant shall pay for water, sewer, gas, electricity,
heat, power, telephone and other communication services and any other utilities
supplied to or consumed in or on the Premises. Landlord shall not be responsible
or liable for any interruption in utility service, nor shall such interruption
affect the continuation or validity of this lease.
(f) NET LEASE. Except for the obligations of Landlord expressly set forth
herein, this lease is a "triple net lease" and Landlord shall receive the
Minimum Annual Rent as net income from the Premises, not diminished by any
expenses other than payments under any mortgages, and Landlord is not and shall
not be required to render any services of any kind to Tenant. The term "RENT" as
used in this lease means the Minimum Annual Rent, Annual Operating Expenses and
any other additional rent or sums payable by Tenant to Landlord pursuant to this
lease, all of which shall be deemed rent for purposes of Landlord's rights and
remedies with respect thereto. Tenant shall pay all Rent to Landlord within 30
days after Tenant is billed, unless otherwise provided in this lease, and
interest shall accrue on all sums due but unpaid.
8. SIGNS. Except for signs which are located wholly within the interior of the
-----
Premises and not visible from the exterior of the Premises, no signs shall be
placed on the Property without the prior written consent of Landlord. All signs
installed by Tenant shall be maintained by Tenant in good condition and Tenant
shall remove all such signs at the termination of this lease and shall repair
any damage caused by such installation, existence or removal.
9. ALTERATIONS AND FIXTURES.
------------------------
(a) Subject to Section 10, Tenant shall have the right to install its
trade fixtures in the Premises, provided that no such installation or removal
thereof shall affect any structural portion of the Property nor any utility
lines, communications lines, equipment or facilities in the Building serving any
tenant other than Tenant. At the expiration or termination of this lease and at
the option of Landlord or Tenant, Tenant shall remove such installation(s) and,
in the event of such removal, Tenant shall repair any damage caused by such
installation or removal; if Tenant, with Landlord's written consent, elects not
to remove such installation(s) at the expiration or termination of this lease,
all such installations shall remain on the Property and become the property of
Landlord without payment by Landlord.
(b) Except for non-structural changes which do not exceed $5,000 in the
aggregate, Tenant shall not make or permit to be made any alterations to the
Premises without Landlord's prior written consent. Tenant shall pay the costs of
any required architectural engineering reviews. In making any alterations, (i)
Tenant shall deliver to Landlord the plans, specifications and necessary
permits, together with certificates evidencing that Tenant's contractors and
subcontractors have adequate insurance coverage naming Landlord and Landlord's
agent as additional insureds, at least 10 days prior to commencement thereof,
(ii) such alterations shall not impair the structural strength of the Building
or any other improvements or reduce the value of the Property or affect any
utility lines, communications lines, equipment or facilities in the Building
serving any tenant other than Tenant, (iii) Tenant shall comply with Section 10
and (iv) the occupants of the Building and of any adjoining property shall not
be disturbed thereby. All alterations to the Premises by Tenant shall be the
property of Tenant until the expiration or termination of this lease at that
time all such alterations shall remain on the Property and become the property
of Landlord without payment by Landlord unless Landlord gives written notice to
7
<PAGE>
Tenant to remove the same, in which event Tenant will remove such alterations
and repair any resulting damage. At Tenant's request prior to Tenant making any
alterations, Landlord shall notify Tenant in writing, whether Tenant is required
to remove such alterations at the expiration or termination of this lease.
10. MECHANICS' LIENS. Tenant shall pay promptly any contractors and
materialmen who supply labor, work or materials to Tenant at the Property and
shall take all steps permitted by law in order to avoid the imposition of any
mechanic's lien upon all or any portion of the Property. Should any such lien
or notice of lien be filed for work performed for Tenant other than by Landlord,
Tenant shall bond against or discharge the same within 5 days after Tenant has
notice that the lien or claim is filed regardless of the validity of such lien
or claim. Nothing in this lease is intended to authorize Tenant to do or cause
any work to be done or materials to be supplied for the account of Landlord, all
of the same to be solely for Tenant's account and at Tenant's risk and expense.
Throughout this lease the term "MECHANIC'S LIEN" is used to include any lien,
encumbrance or charge levied or imposed upon all or any portion of, interest in
or income from the Property on account of any mechanic's, laborer's,
materialman's or construction lien or arising out of any debt or liability to or
any claim of any contractor, mechanic, supplier, materialman or laborer and
shall include any mechanic's notice of intention to file a lien given to
Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of
refusal to pay naming Landlord or Tenant and any injunctive or equitable action
brought by any person claiming to be entitled to any mechanic's lien.
11. LANDLORD'S RIGHT OF ENTRY. Tenant shall permit Landlord and its Agents to
-------------------------
enter the Premises at all reasonable times following reasonable notice (except
in the event of an emergency), for the purpose of inspection, maintenance or
making repairs, alterations or additions as well as to exhibit the Premises for
the purpose of sale or mortgage and, during the last 12 months of the Term, to
exhibit the Premises to any prospective tenant. Landlord will make reasonable
efforts not to inconvenience Tenant in exercising the foregoing rights, but
shall not be liable for any loss of occupation or quiet enjoyment thereby
occasioned.
12. DAMAGE BY FIRE OR OTHER CASUALTY.
--------------------------------
(a) If the Premises or Building shall be damaged or destroyed by fire or
other casualty, Tenant promptly shall notify Landlord and Landlord, subject to
the conditions set forth in this Section 12, shall repair such damage and
restore the Premises to substantially the same condition in which they were
immediately prior to such damage or destruction, but not including the repair,
restoration or replacement of the fixtures or alterations installed by Tenant.
Landlord shall notify Tenant in writing, within 30 days after the date of the
casualty, if Landlord anticipates that the restoration will take more than 180
days from the date of the casualty to complete, in such event, either Landlord
or Tenant may terminate this lease effective as of the date of casualty by
giving written notice to the other within 10 days after Landlord's notice.
Further, if a casualty occurs during the last 12 months of the Term or any
extension thereof, Landlord may cancel this lease unless Tenant has the right
to extend the Term for at least 3 more years and does so within 30 days after
the date of the casualty.
(b) Landlord shall maintain a 12 month rental coverage endorsement or
other comparable form of coverage as Part of its fire, extended coverage and
special form insurance.
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Tenant will receive an abatement of its Minimum Annual Rent and Annual Operating
Expenses to the extent the Premises are rendered untenantable as determined by
the carrier providing the rental coverage endorsement.
13. CONDEMNATION.
------------
(a) TERMINATION. If (i) all of the Premises are taken by a condemnation
or otherwise for any public or quasi-public use, (ii) any part of the Premises
is so taken and the remainder thereof is insufficient for the reasonable
operation of Tenant's business or (iii) any of the Property is so taken, and, in
Landlord's opinion, it would be impractical or the condemnation proceeds are
insufficient to restore the remainder of the Property, then this lease shall
terminate and all unaccrued obligations hereunder shall cease as of the day
before possession is taken by the condemnor.
(b) PARTIAL TAKING. If there is a condemnation and this lease has not
been terminated pursuant to this Section, (i) Landlord shall restore the
Building and the improvements which are a part of the Premises to a condition
and size as nearly comparable as reasonably possible to the condition and size
thereof immediately prior to the date upon which the condemnor took possession
and (ii) the obligations of Landlord and Tenant shall be unaffected by such
condemnation except that there shall be an equitable abatement of the Minimum
Annual Rent according to the rental value of the Premises before and after the
date upon which the condemnor took possession and/or the date Landlord completes
such restoration.
(c) AWARD. In the event of a condemnation affecting Tenant, Tenant
shall have the right to make a claim against the condemnor for moving expenses
and business dislocation damages to the extent that such claim does not reduce
the sums otherwise payable by the condemnor to Landlord. Except as aforesaid and
except as set forth in (d) below, Tenant hereby assigns all claims against the
condemnor to Landlord.
(d) TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this lease or give Tenant any right to any rental abatement. Such a
temporary taking will be treated as if Tenant had sublet the Premises to the
condemnor and had assigned the proceeds of the subletting to Landlord to be
applied on account of Tenant's obligations hereunder. Any award for such a
temporary taking during the Term shall be applied first, to Landlord's costs of
collection and, second, on account of sums owing by Tenant hereunder, and if
such amounts applied on account of sums owing by Tenant hereunder should exceed
the entire amount owing by Tenant for the remainder of the Term, the excess will
be paid to Tenant.
14. NON-ABATEMENT OF RENT. Except as otherwise expressly provided as to damage
---------------------
by fire or other casualty in Section 12(b) and as to condemnation in Section
13(b), there shall be no abatement or reduction of the Rent for any cause
whatsoever, and this lease shall not terminate, and Tenant shall not be entitled
to surrender the Premises.
15. INDEMNIFICATION OF LANDLORD. Subject to Sections 7(c)(iii) and 16, Tenant
---------------------------
will protect, indemnify and hold harmless Landlord and its Agents from and
against any and all claims, actions, damages, liability and expense (including
fees of attorneys, investigators and experts) in connection with loss of life,
personal injury or damage to property in or about the Premises or
9
<PAGE>
arising out of the occupancy or use of the Premises by Tenant or its Agents or
occasioned wholly or in part by any act or omission of Tenant or its agents,
whether prior to, during or after the Term, except to the extent such loss,
injury or damage was caused by the negligence of Landlord or its Agents. In case
any action or proceeding is brought against Landlord and/or its Agents by reason
of the foregoing, Tenant, at its expense, shall resist and defend such action or
proceeding, or cause the same to be resisted and defended by counsel (reasonably
acceptable to Landlord and its Agents) designated by the insurer whose policy
covers such occurrence or by counsel designated by Tenant and approved by
Landlord and its Agents. Tenant's obligations pursuant to this Section 15 shall
survive the expiration or termination of this lease.
16. WAIVER OF CLAIMS. Landlord and Tenant each hereby waives all claims for
----------------
recovery against the other for any loss or damage which may be inflicted upon
the property of such party even if such loss or damage shall be brought about by
the fault or negligence of the other party or its Agents' provided, however,
that such waiver by Landlord shall not be effective with respect to any
liability of Tenant described in Sections 4(c) and 7(d)(iv).
17. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performing all of
---------------
its covenants, agreements and conditions of this lease, shall have quiet and
peaceful possession of the Premises as against anyone claiming by or through
Landlord, subject, however, to the exceptions, reservations and conditions of
this lease.
18. ASSIGNMENT AND SUBLETTING.
-------------------------
(a) LIMITATION. Tenant shall not transfer this lease, voluntarily or
by operation of law, without the prior written consent of Landlord which shall
not be withheld unreasonably. However, Landlord's consent shall not be required
in the event of any transfer by Tenant to an affiliate of Tenant which is at
least as creditworthy as Tenant as of the date of this lease and provided Tenant
delivers to Landlord the instrument described in Section (c)(iii) below,
together with a certification of such creditworthiness by Tenant and such
affiliate. Any transfer not in conformity with this Section 18 shall be void at
the option of Landlord and Landlord may exercise any or all of its rights under
Section 23. A consent to one transfer shall not be deemed to be a consent to
any subsequent transfer. "Transfer" shall include any sublease, assignment,
license or concession agreement, change in ownership or control of Tenant,
mortgage or hypothecation of this lease or Tenant's interest therein or in all
or a portion of the Premises.
(b) OFFER TO LANDLORD. Tenant acknowledges that the terms of this lease,
including the Minimum Annual Rent, have been based on the understanding that
Tenant physically shall occupy the Premises for the entire Term. Therefore,
upon Tenant's request to transfer all or a portion of the Premises, at the
option of Landlord, Tenant and Landlord shall execute an amendment to this lease
removing such space from the Premises, Tenant shall be relieved of any liability
with respect to such space and Landlord shall have the right to lease such space
to any party, including Tenant's proposed transferee.
(c) CONDITIONS. Notwithstanding the above, the following shall apply to
any transfer, with or without Landlord's consent:
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<PAGE>
(i) As of the date of any transfer, Tenant shall not be in default
under this lease nor shall any act or omission have occurred which would
constitute a default with the giving of notice and/or the passage of time.
(ii) No transfer shall relieve Tenant of its obligation to pay the
Rent and to perform all its other obligations hereunder. The acceptance of
Rent by Landlord from any person shall not be deemed to be a waiver by
Landlord of any provision of this lease or to be a consent to any transfer.
(iii) Each transfer shall be by a written instrument in form and
substance satisfactory to Landlord which shall (A) include an assumption of
liability by any transferee of all Tenant's obligations and the
transferee's ratification of and agreement to be bound by all the
provisions of this lease, (B) afford Landlord the right of direct action
against the transferee pursuant to the same remedies as are available to
Landlord against Tenant and (C) be executed by Tenant and the transferee.
(iv) Tenant shall pay, within 10 days of receipt of an invoice which
shall be no less than $250, Landlord's reasonable attorneys' fees and costs
in connection with the review, processing and documentation of any transfer
for which Landlord's consent is requested.
19. SUBORDINATION; MORTGAGEE'S RIGHTS.
---------------------------------
(a) This lease shall be subordinate to any first mortgage or other primary
encumbrance now or hereafter affecting the Premises. Although the subordination
is self-operative, within 10 days after written request, Tenant shall execute
and deliver any further instruments confirming such subordination of this lease
and any further instruments of attornment that may be desired by any such
mortgagee or Landlord. However, any mortgagee may at any time subordinate its
mortgage to this lease, without Tenant's consent, by giving written notice to
Tenant, and thereupon this lease shall be deemed prior to such mortgage without
regard to their respective dates of execution and delivery; provided, however,
that such subordination shall not affect any mortgagee's right to condemnation
awards, casualty insurance proceeds, intervening liens or any right which shall
arise between the recording of such mortgage and the execution of this lease.
(b) It is understood and agreed that any mortgagee shall not be liable to
Tenant for any funds paid by Tenant to Landlord unless such funds actually have
been transferred to such mortgagee by Landlord.
(c) Notwithstanding the provisions of Sections 12 and 13 above, Landlord's
obligation to restore the Premises after a casualty or condemnation shall be
subject to the consent and prior rights of Landlord's first mortgagee.
20. RECORDING; TENANT'S CERTIFICATE. Tenant shall not record this lease or a
-------------------------------
memorandum thereof without Landlord's prior written consent. Within 10 days
after Landlord's written request from time to time:
11
<PAGE>
(a) Tenant shall execute, acknowledge and deliver to Landlord a written
statement certifying the Commencement Date and Expiration Date of this lease,
that this lease is in full force and effect and has not been modified and
otherwise as set forth in the form of estoppel certificate attached as Exhibit
"D" or with such modifications as may be necessary to reflect accurately the
stated facts and/or such other certifications as may be requested by a mortgagee
or purchaser. Tenant understands that its failure to execute such documents may
cause Landlord serious financial damage by causing the failure of a financing or
sale transaction.
(b) Tenant shall furnish to Landlord, Landlord's mortgagee, prospective
mortgagee or purchaser reasonably requested financial information.
21. SURRENDER; ABANDONED PROPERTY.
-----------------------------
(a) Subject to the terms of Sections 9(b), 12(a) and 13(b), at the
expiration or termination of this lease, Tenant promptly shall yield up in the
same condition, order and repair in which they are required to be kept
throughout the Term, the Premises and all improvements thereto, and all fixtures
and equipment servicing the Building, ordinary wear and tear excepted.
(b) Upon or prior to the expiration or termination of this lease, Tenant
shall remove any personal property from the Property. Any personal property
remaining thereafter shall be deemed conclusively to have been abandoned, and
Landlord at Tenant's expense, may remove, store, sell or otherwise dispose of
such property in such manner as Landlord may see fit and/or Landlord may retain
such property as its property. If any part thereof shall be sold, then Landlord
may receive and retain the proceeds of such sale and apply the same, at its
option, against the expenses of the sale, the cost of moving and storage and any
Rent due under this lease.
(c) If Tenant, or any person claiming through Tenant, shall continue to
occupy the Premises after the expiration or termination of this lease or any
renewal thereof, such occupancy shall be deemed to be under a month-to-month
tenancy under the same terms and conditions set forth in this lease, except that
the monthly installment of the Minimum Annual Rent during such continued
occupancy shall be double the amount applicable to the last month of the Term.
Anything to the contrary notwithstanding, any holding over by Tenant without
Landlord's prior written consent shall constitute a default hereunder and shall
be subject to all the remedies available to Landlord.
22. CURING TENANT'S DEFAULTS. If Tenant shall be in default in the performance
------------------------
of any of its obligations hereunder, Landlord, without any obligation to do so,
in addition to any other rights it may have in law or equity, may elect to cure
such default on behalf of Tenant after written notice (except in the case of
emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums
paid or costs incurred by Landlord in curing such default, including interest
thereon from the respective dates of Landlord's incurring such costs, which sums
and costs together with interest shall be deemed additional rent.
23. DEFAULTS; REMEDIES.
------------------
(a) DEFAULTS. It shall be an event of default:
12
<PAGE>
(i) If Tenant does not pay in full when due any and all Rent;
(ii) If Tenant fails to observe and perform or otherwise breaches
any other provision of this lease;
(iii) If Tenant abandons the Premises, which shall be conclusively
presumed if the Premises remain unoccupied for more than 10 consecutive
days, or removes or attempts to remove Tenant's goods or property other
than in the ordinary course of business; or
(iv) If Tenant becomes insolvent or bankrupt in any sense or makes a
general assignment for the benefit of creditors or offers a settlement to
creditors, or if a petition in bankruptcy or for reorganization or for an
arrangement with creditors under any federal or state law is filed by or
against Tenant, or a bill in equity or other proceeding for the appointment
of a receiver for any of Tenant's assets is commenced, or if any of the
real or personal property of Tenant shall be levied upon; provided,
however, that any proceeding brought by anyone other than Landlord or
Tenant under any bankruptcy, insolvency, receivership or similar law shall
not constitute a default until such proceeding has continued unstayed for
more than 60 consecutive days.
(b) REMEDIES. Then, and in any such event, Landlord shall have the
following rights:
(i) To charge a late payment fee equal to the greater of $100 or 5%
of any amount owed to Landlord pursuant to this lease which is not paid
within 5 days after the due date.
(ii) To enter and repossess the Premises, by breaking open locked
doors if necessary, and remove all persons and all or any property
therefrom, by action at law or otherwise, without being liable for
prosecution or damages therefor, and Landlord may, at Landlord's option,
make alterations and repairs in order to relet the Premises and relet all
or any part(s) of the Premises for Tenant's account. Tenant agrees to pay
to Landlord on demand any deficiency that may arise by reason of such
reletting. In the event of releting without termination of this lease,
Landlord may at any time thereafter elect to terminate this lease for such
previous breach.
(iii) To accelerate the whole or any part of the Rent for the balance
of the Term, and declare the same to be immediately due and payable.
(iv) To terminate this lease and the Term without any right on the
part of Tenant to save the forfeiture by payment of any sum due or by other
performance of any condition, term or covenant broken.
(c) GRACE PERIOD. Notwithstanding anything hereinabove stated, neither
party will exercise any available right because of any default of the other,
except those remedies contained in subsection (b)(i) of this Section, unless
such party shall have first given 10 days written notice thereof to the
defaulting party, and the defaulting party shall have failed to cure the default
within such period; provided, however, that:
13
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(i) No such notice shall be required if Tenant fails to comply with
the provisions of Sections 10 or 20(a), in the case of emergency as set
forth in Section 22 or in the event of any default enumerated in
subsections (a)(iii) and (iv) of this Section.
(ii) Landlord shall not be required to give such 10 days notice more
than 2 times during any 12 month period.
(iii) If the default consists of something other than the failure to
pay money which cannot reasonably be cured within 10 days neither party
will exercise any right if the defaulting party begins to cure the default
within the 10 days and continues actively and diligently in good faith to
completely cure said default.
(iv) Tenant agrees that any notice given by Landlord pursuant to
this Section which is served in compliance with Section 27 shall be
adequate notice for the purpose of Landlord's exercise of any available
remedies.
(d) NON-WAIVER; NON-EXCLUSIVE. No waiver by Landlord of any breach by
Tenant shall be a waiver of any subsequent breach, nor shall any forbearance by
Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord of
any rights and remedies with respect to such or any subsequent breach. Efforts
by Landlord to mitigate the damages caused by Tenant's default shall not
constitute a waiver of Landlord's right to recover damages hereunder. No right
or remedy herein conferred upon or reserved to Landlord is intended to be
exclusive of any other right or remedy provided herein or by law, but each shall
be cumulative and in addition to every other right or remedy given herein or now
or hereafter existing at law or in equity. No payment by Tenant or receipt or
acceptance by Landlord of a lesser amount than the total amount due Landlord
under this lease shall be deemed to be other than on account, nor shall any
endorsement or statement on any check or payment be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of Rent due, or Landlord's right to
pursue any other available remedy.
(e) COSTS AND ATTORNEYS' FEES. If either party commences an action
against the other party arising out of or in connection with this lease, the
prevailing party shall be entitled to have and recover from the losing party
attorneys' fees, costs of suit, investigation expenses and discovery costs,
including costs of appeal.
24. REPRESENTATIONS OF TENANT. Tenant represents to Landlord and agrees that:
-------------------------
(a) The word "Tenant" as used herein includes the Tenant named above as
well as its successors and assigns, each of which shall be under the same
obligations and liabilities and each of which shall have the same rights,
privileges and powers as it would have possessed had it originally signed this
lease as Tenant. Each and every of the persons named above as Tenant shall be
bound jointly and severally by the terms, covenants and agreements contained
herein. However, no such rights, privileges or powers shall inure to the
benefit of any assignee of Tenant immediate or remote, unless Tenant has
complied with the terms of Section 18 and the assignment to such assignee is
permitted or has been approved in writing by Landlord. Any notice required or
permitted by the terms of this lease may be given by or to any one of the
14
<PAGE>
persons named above as Tenant, and shall have the same force and effect as if
given by or to all thereof.
(b) If Tenant is a corporation, partnership or any other form of
business association or entity, Tenant is duly formed and in good standing, and
has full corporate or partnership power and authority, as the case may be, to
enter into this lease and has taken all corporate or partnership action, as the
case may be, necessary to carry out the transaction contemplated herein, so that
when executed, this lease constitutes a valid and binding obligation enforceable
in accordance with its terms. Tenant shall provide Landlord with corporate
resolutions or other proof in a form acceptable to Landlord, authorizing the
execution of this lease at the time of such execution.
25. LIABILITY OF LANDLORD. The word "LANDLORD" as used herein includes the
---------------------
Landlord named above as well as its successors and assigns, each of which shall
have the same rights, remedies, powers, authorities and privileges as it would
have had it originally signed this lease as Landlord. Any such person or
entity, whether or not named herein, shall have no liability hereunder after it
ceases to hold title to the Premises except for obligations already accrued
(and, as to any unapplied portion of Tenant's Security Deposit, Landlord shall
be relieved of all liability therefor upon transfer of such portion to its
successor in interest) and Tenant shall look solely to Landlord's successor in
interest for the performance of the covenants and obligations of the Landlord
hereunder which thereafter shall accrue. Neither Landlord nor any principal of
Landlord nor any owner of the Property, whether disclosed or undisclosed, shall
have any personal liability with respect to any of the provisions of this lease
or the Premises, and if Landlord is in breach or default with respect to
Landlord's obligations under this lease or otherwise, Tenant shall look solely
to the equity of Landlord in the Property for the satisfaction of Tenant's
claims. Notwithstanding the foregoing, no mortgagee or ground lessor succeeding
to the interest of Landlord hereunder (either in terms of ownership or
possessory rights) shall be (a) liable for any previous act or omission of a
prior landlord, (b) subject to any rental offsets or defenses against a prior
landlord or (c) bound by any amendment of this lease made without its written
consent, or by payment by Tenant of Minimum Annual Rent in advance in excess of
one monthly installment.
26. INTERPRETATION; DEFINITIONS.
---------------------------
(a) CAPTIONS. The captions in this lease are for convenience only and are
not a part of this lease and do not in any way define, limit, describe or
amplify the terms and provisions of this lease or the scope or intent thereof.
(b) ENTIRE AGREEMENT. This lease represents the entire agreement between
the parties hereto and there are no collateral or oral agreements or
understandings between Landlord and Tenant with respect to the Premises or the
Property. No rights, easements or licenses are acquired in the Property or any
land adjacent to the Property by Tenant by implication or otherwise except as
expressly set forth in the provisions of this lease. This lease shall not be
modified in any manner except by an instrument in writing executed by the
parties. The masculine (or neuter) pronoun and the singular number shall
include the masculine, feminine and neuter genders and the singular and plural
number. The word "INCLUDING" followed by any specific item(s) is deemed to
refer to samples rather than to be words of limitation. Both parties
15
<PAGE>
having participated fully and equally in the negotiation and preparation of this
lease, this lease shall not be more strictly construed, nor any ambiguities in
this lease resolved, against either Landlord or Tenant.
(c) COVENANTS. Each covenant, agreement, obligation, term, condition or
other provision herein contained shall be deemed and construed as a separate and
independent covenant of the party bound by, undertaking or making the same, not
dependent on any other provision of this lease unless otherwise expressly
provided. All of the terms and conditions set forth in this lease shall apply
throughout the Term unless otherwise expressly set forth herein.
(d) INTEREST. Wherever interest is required to be paid hereunder, such
interest shall be at the highest rate permitted under law but not in excess of
15% per annum.
(e) SEVERABILITY; GOVERNING LAW. If any provisions of this lease shall be
declared unenforceable in any respect, such unenforceability shall not affect
any other provision of this lease, and each such provision shall be deemed to be
modified, if possible, in such a manner as to render it enforceable and to
preserve to the extent possible the intent of the parties as set forth herein.
This lease shall be construed and enforced in accordance with the laws of the
state in which the Property is located.
(f) "MORTGAGE" AND "MORTGAGEE." The word "MORTGAGE" as used herein
includes any lien or encumbrance on the Premises or the Property or on any part
of or interest in or appurtenance to any of the foregoing, including without
limitation any ground rent or ground lease if Landlord's interest is or becomes
a leasehold estate. The word "MORTGAGEE" as used herein includes the holder of
any mortgage, including any ground lessor if Landlord's interest is or becomes a
leasehold estate. Wherever any right is given to a mortgagee, that right may be
exercised on behalf of such mortgagee by any representative or servicing agent
of such mortgagee.
(g) "PERSON." The word "PERSON" is used herein to include a natural
person, a partnership, a corporation, an association and any other form of
business association or entity.
(h) PROPORTIONATE SHARE. At any time or times, upon request of Landlord
or of any tenant of the Building, the method for allocating Tenant's
Proportionate Share of any Impositions, cost, charge, rent, expense or payment
then or thereafter payable shall be redetermined by an independent qualified
expert. The cost of such redetermination shall be borne by the tenants of the
Building in the same proportion as that determined by such expert for
reallocation of said relevant sum; except that if such redetermination is
requested by a tenant, the cost thereof shall be borne entirely by such tenant
if the proportionate share of said relevant sum allocable to such tenant as the
result of such redetermination shall not vary by at least 5% from the amount
which would have been allocable to such tenant in accordance with the percentage
based on square foot area.
27. NOTICES. Any notice or other communications under this lease shall be in
-------
writing and addressed to Landlord or Tenant at their respective addresses
specified at the beginning of this lease, except that after the Commencement
Date Tenant's address shall be at the Premises, (or to such other address as
either may designate by notice to the other) with a copy to any mortgagee
16
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or other party designated by Landlord. Each notice or other communication shall
be deemed given if sent by prepaid overnight delivery service or by certified
mail, return receipt requested, postage prepaid or in any other manner, with
delivery in any case evidenced by a receipt, and shall be deemed received on the
day of actual receipt by the intended recipient or on the business day delivery
is refused. The giving of notice by Landlord's attorneys, representatives and
agents under this Section shall be deemed to be the acts of Landlord; however,
the foregoing provisions governing the date on which a notice deemed to have
been received shall mean and refer to the date on which a party to this lease,
and not its counsel or other recipient to which a copy of the notice may be
sent, is deemed to have received the notice.
28. SECURITY DEPOSIT. At the time of signing this lease, Tenant shall deposit
----------------
with Landlord the Security Deposit to be retained by Landlord as cash security
for the faithful performance and observance by Tenant of the provisions of this
lease. Tenant shall not be entitled to any interest whatever on the Security
Deposit. Landlord shall have the right to commingle the Security Deposit with
its other funds. Landlord may use the whole or any part of the Security Deposit
for the payment of any amount as to which Tenant is in default hereunder or to
compensate Landlord for any loss or damage it may suffer by reason of Tenant's
default under this lease. If Landlord uses all or any portion of the Security
Deposit as herein provided, within 10 days after written demand therefor, Tenant
shall pay Landlord cash in amount equal to that portion of the Security Deposit
used by Landlord. If Tenant shall comply fully and faithfully with all the
provisions of this lease, the Security Deposit shall be returned to Tenant after
the Expiration Date and surrender of the Premises to Landlord.
17
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IN WITNESS WHEREOF, and in consideration of the mutual entry into this lease and
for other good and valuable consideration, and intending to be legally bound,
Landlord and Tenant have executed this lease.
LANDLORD:
LIBERTY PROPERTY LIMITED PARTNERSHIP
Date Signed: By: Liberty Property Trust, Sole
General Partner
6/5/98 By: /s/ Leslie R. Price
- ---------------------------------- -------------------------------
Leslie R. Price, Senior Vice
President
Date Signed: TENANT:
QUADRANT INTERNATIONAL, INC.
5/27/98
- ----------------------------------
Attest: __________________________ By: /s/ Jason Liu
-------------------------------
Name: ____________________________ Name: Jason Liu
-------------------------------
Title: ___________________________ Title: Chief Financial Officer
-------------------------------
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RIDER
-----
9. PA ADDITIONAL REMEDIES.
----------------------
(a) When this lease and the Term or any extension thereof shall have been
terminated on account of any default by Tenant, or when the Term or any
extension thereof shall have expired, Tenant hereby authorizes any attorney of
any court of record of the Commonwealth of Pennsylvania to appear for Tenant and
for anyone claiming by, through or under Tenant and to confess judgment against
all such parties, and in favor of Landlord, in ejectment and for the recovery of
possession of the Premises, for which this lease or a true and correct copy
hereof shall be good and sufficient warrant. AFTER THE ENTRY OF ANY SUCH
JUDGMENT A WRIT OF POSSESSION MAY BE ISSUED THEREON WITHOUT FURTHER NOTICE TO
TENANT AND WITHOUT A HEARING. If for any reason after such action shall have
been commenced it shall be determined and possession of the Premises remain in
or be restored to Tenant, Landlord shall have the right for the same default and
upon any subsequent default(s) or upon the termination of this lease or Tenant's
right of possession as herein set forth, to again confess judgment as herein
provided, for which this lease or a true and correct copy hereof shall be good
and sufficient warrant.
(b) If Tenant shall default in the payment of the Rent due hereunder,
Tenant hereby authorizes any attorney of any court of record of the Commonwealth
of Pennsylvania to appear for Tenant and to confess judgment against Tenant and
in favor of Landlord, for all sums due hereunder plus interest, costs and an
attorney's collection commission equal to the greater of 10% of all such sums or
$1,000, for which this lease or a true and correct copy hereof shall be good and
sufficient warrant. TENANT UNDERSTANDS THAT THE FOREGOING PERMITS LANDLORD TO
ENTER A JUDGMENT AGAINST TENANT WITHOUT PRIOR NOTICE OR HEARING. ONCE SUCH A
JUDGMENT HAS BEEN ENTERED AGAINST TENANT, ONE OR MORE WRITS OF EXECUTION OR
WRITS OF GARNISHMENT MAY BE ISSUED THEREON WITHOUT FURTHER NOTICE TO TENANT AND
WITHOUT A HEARING, AND, PURSUANT TO SUCH WRITS, LANDLORD MAY CAUSE THE SHERIFF
OF THE COUNTY IN WHICH ANY PROPERTY OF TENANT IS LOCATED TO SEIZE TENANT'S
PROPERTY BY LEVY OR ATTACHMENT. IF THE JUDGMENT AGAINST TENANT REMAINS UNPAID
AFTER SUCH LEVY OR ATTACHMENT, LANDLORD CAN CAUSE SUCH PROPERTY TO BE SOLD BY
THE SHERIFF EXECUTING THE WRITS OR, IF SUCH PROPERTY CONSISTS OF A DEBT OWED TO
TENANT BY ANOTHER ENTITY, LANDLORD CAN CAUSE SUCH DEBT TO BE PAID DIRECTLY TO
LANDLORD IN AN AMOUNT UP TO BUT NOT TO EXCEED THE AMOUNT OF THE JUDGMENT
OBTAINED BY LANDLORD AGAINST TENANT, PLUS THE COSTS OF THE EXECUTION. Such
authority shall not be exhausted by one exercise thereof, but judgment may be
confessed as aforesaid from time to time as often as any of said rental and
other sums shall fall due or be in arrears, and such powers may be exercised as
well after the expiration of the initial term of this lease and during any
extended or renewal term of this lease and after the expiration of any extended
or renewal term of this lease.
(c) The warrants to confess judgment set forth above shall continue in
full force and effect and be unaffected by amendments to this lease or other
agreements between Landlord and
R-1
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Tenant even if any such amendments or other agreements increase Tenant's
obligations or expand the size of the Premises. Tenant waives any procedural
errors in connection with the entry of any such judgment or in the issuance of
any one or more writs of possession or execution or garnishment thereon.
(d) TENANT KNOWINGLY AND EXPRESSLY WAIVES (I) ANY RIGHT, INCLUDING,
WITHOUT LIMITATION, UNDER ANY APPLICABLE STATUTE, WHICH TENANT MAY HAVE TO
RECEIVE A NOTICE TO QUIT PRIOR TO LANDLORD COMMENCING AN ACTION FOR REPOSSESSION
OF THE PREMISES AND (II) ANY RIGHT WHICH TENANT MAY HAVE TO NOTICE AND TO
HEARING PRIOR TO A LEVY UPON OR ATTACHMENT OF TENANT'S PROPERTY OR THEREAFTER.
Initials on behalf
of Tenant: _______
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30. TENANT IMPROVEMENTS.
-------------------
Tenant agrees to occupy the premises in its present "as is" condition
and acknowledges that, except as otherwise provided in this lease, Landlord has
made no representation or warranty with respect thereto. Further, Tenant
understands and agrees that Landlord is under no duty to make repairs,
alterations or decorations to the Premises. However, Landlord will provide
space planning services and a one-time $1,500 allowance for paint.
31. AMENDMENT TO ARTICLE 3 ENTITLED "ACCEPTANCE OF PREMISES".
--------------------------------------------------------
Article 3 is hereby amended by deleting the word "zoning" in the first
line thereof, and inserting, in the second line, after the phrase "present uses"
the following:
", except as hereinafter provided,".
Article 3 is further amended by adding at the end of the last
sentence, the following clause:
", which consent shall not be unreasonably withheld, conditioned or
delayed. Landlord represents and warrants that it has received no notice that
the Premises may not be lawfully used for the Use specified in Article 1 (f)
above."
32. AMENDMENT TO ARTICLE 4 ENTITLED "USE: COMPLIANCE".
-------------------------------------------------
Article 4 (b) is hereby amended by adding the following at the end of
the subsection:
"Except as provided above, Landlord shall comply at its sole expense
(including making any alterations or improvements) with all Laws and
Requirements regulating the Property, including but not limited to, those Laws
and Requirements relating to or requiring the alteration or improvement of, the
footings, foundations, structural steel columns and girders forming part of the
Property (unless the need for such compliance arises out of Tenant's use,
occupancy or alteration of the Property, or by any act or omission of Tenant or
its agents, or by reason of a change in the Laws and Requirements subsequent to
the date of this Lease)."
Article 4 (c) is hereby amended by adding the following at the end of
such subsection:
"Landlord represents and warrants that, to the best of its knowledge,
there are not any hazardous substances, hazardous wastes or other materials
regulated under any local, state or federal rules, laws, ordinances, statutes or
regulations ("environmental laws") on or under the Property, except such as
under the environmental laws do not need to be remediated, that the Property,
including the Premises is not in violation of any environmental laws and that
there are not any underground storage tanks located on the Property."
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Article 4 (d) is hereby amended by adding the following in the second
line after the phrase "Restricted Activities":
", which Restricted Activities affect or are reasonably likely to
affect the Premises or Property ".
33. AMENDMENT TO ARTICLE 6 ENTITLED "MINIMUM ANNUAL RENT".
-----------------------------------------------------
Article 6 is hereby amended by adding the following at the end of such
Article:
"Notwithstanding the foregoing, if the remaining 4,925 square feet is
not available for occupancy by Tenant on or before September 1, 1998,
the rent shall be apportioned pro rata on a per diem basis, from
September 1, 1998 until the date that such 4,925 square feet is
available for occupancy."
34. AMENDMENT TO ARTICLE 7 ENTITLED "OPERATION OF PROPERTY: PAYMENT OF
------------------------------------------------------------------
EXPENSES".
---------
Article 7 (a) is hereby amended by inserting in the seventh line,
after the word "Landlord", the phrase "in Landlord's reasonable
judgment".
The following sentence is added at the end of Article 7 (a):
"Notwithstanding the foregoing, if the additional 4,925 square feet is
not available for occupancy by Tenant on or before September 1, 1998, operating
expenses payable by Tenant pursuant to Section 1 (d) (ii) shall be reduced pro
rata on a per diem basis until the date that the 4,925 square feet is available
for occupancy."
Article 7 (b) is hereby modified by adding the following at the end of
the first paragraph thereof: "Notwithstanding the foregoing, if Landlord
receives a refund for Impositions with respect to which Tenant has contributed
its proportionate share, Landlord shall remit to Tenant its proportionate share
of such refund."
Article 7 (d) is hereby amended by inserting on the second line,
before the word "use" and on the same line before the word "act" the phrase
"negligent or improper".
Article 7 (g) is hereby added to Article 7 to provide as follows:
"(g) ABATEMENT FOR INTERRUPTIONS OF ELECTRIC SERVICE TO THE PREMISES
---------------------------------------------------------------
Notwithstanding anything contained to the contrary in Article 7 of
this lease, if, due to the fault of Landlord, its agents, employees, or
contractors, electric service to the Premises is interrupted for a period
exceeding two (2) consecutive business days, commencing with the third
consecutive day of such interruption, Tenant's obligation to pay minimum annual
rent shall be abated, and such abatement shall continue until, but not
including, the first business day on which electric service to the Premises has
been restored."
Article 7 (h) is hereby added to Article 7 to provide as follows:
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"(h) ITEMS EXCLUDED FROM ANNUAL OPERATING EXPENSES
---------------------------------------------
Notwithstanding anything contained in this lease to the contrary, Annual
Operating Expenses shall not include:
(i) Sums expended for obligations or liabilities incurred in
connection with the initial or additional construction or reconstruction of the
Building or other construction costs or matters which are covered by proceeds of
insurance;
(ii) Condemnation costs or uninsured legal claims against the
Landlord;
(iii) The cost of any repair, replacement, or other item which is
capitalized (except for "Included Capital Items" as hereinafter defined);
(iv) Any charge for depreciation, debt service, interest, or rents
paid or incurred by Landlord (other than related to Included Capital Items);
(v) Wages, fees, or other benefits paid to executive or supervisory
personnel (but not maintenance personnel);
(vi) Leasing commissions and other expenses associated with leasing
space in the Building or enforcing the leases of other tenants;
(vii) Costs and expenses associated with the clean-up of any
condition hazardous to the health or environment (provided, however, that Tenant
shall not be relieved of its responsibilities pursuant to Section 4(c) of this
lease);
(viii) Costs reimbursed or reimbursable through insurance proceeds to
repair or replace damage by fire or other insured casualty;
(ix) Any costs reimbursable under contractor warranties;
(x) Legal fees relating to preparation of tenant leases, financing
of the Building, and violations by the Landlord or any tenant under tenant
leases;
(xi) Fees and charges paid to any party affiliated with Landlord to
the extent such fees or charges exceed the fees or charges that would have been
incurred to an independent entity in an arm's length transaction;
(xii) Cost of original art work;
(xiii) Rent for space occupied by a management office or other
Building facilities, (provided, however, Tenant shall be obligated to pay its
Proportionate Share of charges applicable to the Building for space occupied by
personnel maintaining the Building, whether such space is located in the
Building or in another building in the project);
(xiv) Cost of furnishing any additional or special service to any
tenant, if such service is not also available to Tenant;
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<PAGE>
(xv) The cost of any personnel, materials, or services shared by the
Building and any other buildings owned and operated by Landlord, to the extent
allocable to such other buildings;
(xvi) Costs of upgrading the common areas of the Building; and
(xvii) The cost of any fine for Landlord's failure to comply with any
applicable laws, unless caused by Tenant.
The term "Included Capital Items" shall mean Tenant's pro rata share
of capital improvements which Landlord shall install or construct in compliance
with governmental requirements enacted after the date of this lease or as
energy-saving devices which are intended to reduce other items of operating
expenses. Such pro rata share of capital items shall be determined as if such
capital improvement had a useful life of ten years and Tenant shall only be
required to pay for the portion of the useful life of the capital improvement
which falls within the term or any extended term of this lease. Tenant shall
thus make payments in equal annual installments for such capital improvements,
each annual payment to be equal to Tenant's share of one-tenth of the cost of
the capital improvement, including any interest or finance charges thereon until
the term or any renewal thereof shall expire or until the cost of the
improvement has been fully amortized pursuant to this provision, whichever shall
first occur; such payment shall be computed by Landlord at the time of
installation of the capital improvement in the same manner as Landlord makes
computations of Tenant's share of annual operating expenses pursuant to
Paragraph 7 (a) above."
35. AMENDMENT TO ARTICLE 8 ENTITLED "SIGNS".
Article 8 is amended by adding the following sentence:
"Landlord agrees to display Tenant's name on the exterior door in
vinyl lettering".
36. AMENDMENT TO ARTICLE 9 ENTITLED "ALTERATIONS AND FIXTURES".
Article 9 (b) is hereby amended to insert in the second line after the
word "consent" the following:
", which consent shall not be unreasonably withheld or delayed".
In addition, in the same line, before the word "costs" the word
"reasonable" is inserted.
37. AMENDMENT TO ARTICLE 10 ENTITLED "MECHANICS LIENS".
Article 10 is hereby amended by deleting the fourth line thereof, and
substituting the following:
"Tenant shall within five (5) days bond against the same, or proceed
with due diligence to discharge the same within one hundred twenty (120) days,
each such time period
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being measured from the date when Tenant has notice that the lien or claim is
filed regardless of the "
38. AMENDMENT TO ARTICLE 12 ENTITLED "DAMAGE BY FIRE OR OTHER CASUALTY".
-------------------------------------------------------------------
Article 12 (a) is hereby amended by deleting the word "if" in the
fifth line and inserting in its place the phrase "as to whether" and by changing
180 days to 270 days.
The second sentence beginning on the fourth line of Article 12 (a) is
further amended by ending the sentence after the word "complete" on the fifth
line, and deleting the rest of the sentence up through the word "notice" on the
seventh line.
The following is inserted as the third sentence in Article 12 (a):
"If Landlord's notice provides that Landlord anticipates that the
restoration will take more than 270 days to complete, or if such restoration has
not been completed within 270 days, then either Landlord or Tenant may terminate
this lease effective as of the date of the casualty by giving written notice to
the other within ten days after Landlord's notice, or the expiration of the 270
day period as the case may be.
39. AMENDMENT TO ARTICLE 13 ENTITLED "CONDEMNATION".
-----------------------------------------------
Article 13 (b) is hereby amended by inserting the phrase "and annual
operating expenses" after the phrase "minimum annual rent" in the fifth line.
40. AMENDMENT TO ARTICLE 18 ENTITLED "ASSIGNMENT AND SUBLETTING".
------------------------------------------------------------
Article 18 (a) is hereby amended by inserting in the third and fifth
lines after the word "affiliate" the phrase "or corporate successor".
Article 18 (c) (iii) is amended by inserting the word "reasonably" in
the first line after the word "substance".
41. AMENDMENT TO ARTICLE 19 ENTITLED "SUBORDINATION: MORTGAGEE'S RIGHTS".
--------------------------------------------------------------------
Article 19 (a) is amended by changing (10) days in the second line to
(15) days.
A new third sentence is inserted in Article 19 (a) to provide as
follows:
"Landlord agrees to request a non-disturbance agreement from any such
mortgagee in form and substance reasonably satisfactory to Tenant".
42. AMENDMENT TO ARTICLE 20 ENTITLED "TENANT CERTIFICATE".
-----------------------------------------------------
In the second line, after the word, "Landlord's" the word "or
Tenant's" is hereby inserted. At the beginning of clause (a), the words
"Landlord or" are inserted and the phrase "delivered to Landlord" is amended to
state "deliver to the requested party".
43. AMENDMENT TO ARTICLE 23 ENTITLED "DEFAULTS - REMEDIES".
------------------------------------------------------
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In Article 23 (d), in the second line, after the phrase "losing
party", the word "reasonable" is inserted.
44. AMENDMENT TO ARTICLE 23(F).
--------------------------
Article 23 (f) is hereby amended to provide as follows:
"(f) LANDLORD'S DUTY TO MITIGATE DAMAGES
-----------------------------------
In the event that Tenant defaults under any of its obligations under
this lease resulting in Tenant no longer occupying the Premises, Landlord shall
use reasonable efforts to relet the Premises. However, Landlord shall have no
obligation to relet the Premises in preference to other space which may then be
available for rental in the Building or in other buildings owned by Landlord or
its affiliates. If Landlord is successful in reletting the Premises, Tenant
shall be entitled to a credit in mitigation of Landlord's damages in the amount
of all income received by Landlord pursuant to such reletting and attributable
to the term of this lease, after Landlord has first recovered from such income
the costs of such reletting (e.g., real estate brokerage commissions and the
cost of altering the Premises for the substitute tenant).
45. AMENDMENT TO ARTICLE 25 ENTITLED "LIABILITY OF LANDLORD".
--------------------------------------------------------
In the fourth line, after the word "obligations" the phrase "or causes
of action" is inserted.
46. LANDLORD'S INDEMNIFICATION OF TENANT.
------------------------------------
Subject to Sections 7 (c)(iii) and 16, Landlord will protect,
indemnify and hold harmless Tenant and its Agents from and against any and all
claims, actions, damages. liability and expense (including fees of attorneys,
investigators and experts) in connection with loss of life, personal injury or
damage to property caused to any person in or about the Premises occasioned
wholly or in part by the negligence of Landlord or it Agents, except to the
extent such loss, injury or damage was caused by the negligence of Tenant or its
Agents. In case any action or proceeding is brought against Tenant and/or its
Agents by reason of the foregoing, Landlord, at its expense, shall resist and
defend such action or proceeding, or cause the same to be resisted and defended
by counsel (reasonably acceptable to Tenant and its Agents) designated by the
insurer whose policy covers such occurrence or by counsel designated by Landlord
and approved by Tenant and its Agents. Landlord's obligations pursuant to this
Section shall survive the expiration or termination of this Lease.
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EXHIBIT 10.11
[LOGO] SOFTWARE LICENSE AGREEMENT
This Software License Agreement ("Agreement") is made effective as of ,
1999 ("Effective Date") between:
Quadrant International, Inc. ("QI") and ("Licensee")
As of the Effective Date, QI and the Licensee agree as follows:
1. DEFINITIONS. For the purposes of this Agreement,
(a) "QI Software" means QI's software DVD player, as more fully defined in
Schedule A, and subsequent versions thereof.
(b) "License Fee" means the amount of amounts referred to in Section 4 and set
out in Schedule A and payable by Licensee to QI under the terms of this
Agreement.
(c) "Territory" means the geographic area set out in Schedule A.
2. LICENSE. Subject to the terms and conditions of this Agreement, QI grants
to Licensee within the Territory the personal, non-exclusive, non-transferable
limited license and right, for the term of this Agreement, to reproduce the QI
Software and the right to sublicense and distribute to end users who purchase or
have purchased computer systems from Licensee copies of the QI Software,
pursuant to the End User License Agreement, or a substantially similar form, as
set out in Schedule B, to be used in conjunction with Licensee's products.
Nothing herein gives Licensee the right to distribute, or to authorize any other
entity to distribute, the QI Software as a stand-alone product.
3. TERM. Unless sooner terminated pursuant to Section 15 below, this
Agreement shall be effective for a period of one (1) year beginning on the
Effective Date, and shall continue thereafter from year to year until either
party notifies the other party in writing at least ninety (90) days prior to an
anniversary of the Effective Date of its intention not to renew as of such
anniversary date.
4. LICENSE FEES - QI SOFTWARE. A License Fee for each and every copy of QI
Software is payable on a "Per Copy" basis as provided in the attached Schedule
A. Licensee agrees to pay the applicable License Fee to QI when due. Licensee
further acknowledges and agrees that all payments pursuant to this Agreement
will be made by Licensee in U.S. dollars. The Per Copy payment method requires
Licensee to pay a License Fee on a monthly basis to QI for each and every copy
of the QI Software reproduced by Licensee, or provided to Licensee by QI, during
a month and which is sold, shipped, or otherwise distributed by Licensee.
Within fifteen (15) days following the end of each month, Licensee will provide
QI with a report detailing the numbers of copies reproduced or received by
Licensee and payment for the copies specified on the report. QI represents and
Licensee acknowledges that DOLBY license fees shall be in addition to the
Licensee Fees and shall be in the amount set out on Schedule A. QI further
represents and Licensee acknowledges that any license fees assessed during the
term of this agreement by DVD Forum, MPEG LA, CSS or other third parties shall
be in addition to the Licensee Fees as set forth in Schedule A.
5. PAYMENT TERMS. All License Fees and other amounts payable under this
Agreement shall be paid by Licensee to QI promptly when due and without any set-
off or deduction. Any late payments by Licensee shall be subject to added
interest at a rate of 1 1/2 percent per month that such payments are late.
6. AUDIT. During the term of this Agreement, Licensee agrees to keep all
usual and proper records and books of account an all usual and proper entries
relating to each and every copy of the QI Software sold, shipped or otherwise
distributed to a customer. In order to verify statements issued by Licensee and
Licensee's compliance with the terms of this Agreement, QI shall have the right
to: (i) audit the financial records of Licensee so as to verify the applicable
license fee; and (ii) inspect Licensee's facilities and procedures. The cost of
this audit shall be the responsibility of QI unless the audit shows an amount
owing to QI of at least five percent (5%) in addition to the amount paid by
Licensee, in which event Licensee shall be responsible for the costs of such
audit. In no event shall audits be more frequently than semi-annually unless the
immediately preceding audit disclosed a discrepancy.
7. TAXES. All fees and all other charges specified in this Agreement are
exclusive of all applicable goods and services taxes, provincial sales taxes and
any other taxes, including sales or use taxes (collectively called the "Purchase
Taxes"). Licensee shall pay all Purchase Taxes (other than taxes on QI's net
income), howsoever designated or levied, as a result of the transactions
contemplated by this Agreement.
8. OWNERSHIP. The QI Software is licensed, not sold, to Licensee only under
the terms of this Agreement. All right, title and interest in and to the QI
Software shall at all times remain with QI and its licensors and suppliers,
including any and all copyrights, patents, trade secrets, trademarks and other
intellectual property and proprietary rights to the QI Software.
9. TRADEMARKS AND TRADENAMES. Licensee shall not remove, alter or obscure any
QI trademark, logo or similar identifying mark on the QI Software. Licensee
recognizes QI's ownership and title to the trademark "QI", all other trademarks
and trade names of QI and the goodwill attaching thereto. If QI, in its sole
discretion, determines that any of Licensee's advertising, promotional or other
materials are inaccurate or misleading with respect to QI or the QI Software or
are inaccurate or misleading with respect to, or otherwise misuse, QI trademarks
or trade names, Licensee will, upon notice from QI, promptly change or correct
such materials at its own expense.
Page 1 of 6
<PAGE>
[LOGO] SOFTWARE LICENSE AGREEMENT
10. PRODUCT SUPPORT. QI shall be responsible for providing reasonable
maintenance and support to Licensee for QI Software consistent with QI's then
current customer and product support policies. Licensee agrees that Licensee is
solely responsible for any and all support to be provided to end users for QI
software.
11. RESTRICTIONS.
(a) QI represents and Licensee acknowledges that the QI Software contains
proprietary and confidential information of QI and constitutes trade secrets of
QI (collectively referred to as "Confidential Information") and are protected by
copyright, patent, and or trade secret laws and international treaties.
Licensee acknowledges the proprietary rights of QI in and to the QI Software and
Licensee agrees not to decompile, reverse engineer or otherwise determine the
operation of the products or permit any third party to do so.
(b) Licensee agrees to implement and support a mutually agreed upon Copy
Protection mechanism as requested by QI.
(c) Licensee will not and will not authorize any other entity to copy, modify,
disclose or transfer to any person all or any part of the QI Software, except as
expressly authorized in section 2 of this Agreement.
(d) Licensee will not make the QI Software available for distribution on-line
via the Internet or a bulletin board, or by any other electronic means.
(e) Licensee will not knowingly distribute to any customer who infringes QI's
proprietary rights in the QI Software.
(f) Licensee represents and warrants that it is a licensee of Macrovision
Corporation ("Macrovision") and is permitted under its license agreement with
Macrovision to sell and distribute QI software including such functionality.
(g) Licensee represents and warrants that it is a licensee of CSS and is
permitted under its license agreement with CSS to sell and distribute QI
software including such functionality.
12. INDEMNIFICATION.
(a) QI agrees to defend Licensee against, and pay the amount of any adverse
final judgment (or settlement to which QI consents) resulting from any third
party claims alleging that the QI Software as licensed under this Agreement
infringes any U.S. patent, copyright, or trade secret. QI's obligation under
this section is conditioned on Licensee's agreement that if the QI Software, in
QI's opinion, is likely to become the subject of such a claim, Licensee will
permit QI, at QI's option and expense, to either procure for Licensee the right
to continue marketing and using the allegedly infringing QI Software or replace
or modify them so as to become non-infringing. If neither of the foregoing
alternatives is available on terms which are reasonable in QI's sole judgement,
QI may terminate the license under this Agreement and Licensee shall immediately
cease shipping and or distributing copies of the QI Software.
(b) QI shall have no obligation with respect to any claim based upon: (i)
Licensee's combination of the QI Software with any other product provided such
claim would have been avoided without such combination; (ii) modifications or
changes made by Licensee to the QI Software; (iii) use of other than the most
current unaltered release of the QI Software; (iv) continued use of the QI
Software after Licensee first receives notice or such claim or action; (v) use
of the QI Software in a manner for which they were not designed or not according
to their specifications; or (vi) a claim of infringement of any essential
patents or intellectual property rights related to the MPEGII standard or any
other industry standard relating to DVD.
(c) Licensee will, at its expense, defend QI against any claim that the QI
Software infringe a patent or copyright of a third party which claim is not
subject to indemnification by QI under the above paragraph. Additionally,
Licensee will, at its expense defend QI against (a) any claim that arises out of
any alleged breach of warranty or representation given by Licensee in this
Agreement; (b) any breach of any obligation of Licensee under this Agreement.
Licensee will pay resulting costs and damages finally awarded by a court subject
to the paragraph below.
(d) To qualify for such defense and payment, the indemnified party must: (i)
give the indemnifying party prompt written notice of any such claim; and (ii)
allow the indemnifying party to control the defense and cooperate with the
indemnifying party in the defense and settlement negotiations.
13. QI REPRESENTATIONS AND WARRANTIES.
(a) QI represents and warrants to Licensee that it has the requisite power and
authority to enter into and carry out the terms of this Agreement.
(b) QI is either the owner of the QI Software and all intellectual property
rights therein or has procured all necessary rights and licenses from the owners
of such rights to enter into and carry out the terms of this Agreement.
14. DISCLAIMERS. LICENSEE AGREES AND UNDERSTANDS THAT QI SOFTWARE IS PROVIDED
"AS IS" AND QI MAKES NO WARRANTIES, PROMISES, CONDITIONS OR UNDERTAKINGS
WHATSOEVER, WHETHER EXPRESS, IMPLIED, COLLATERAL OR OTHERWISE, WITH REGARD TO
THE QI SOFTWARE, ORANY PARTS THEREOF, OR ANY SERVICES DELIVERED OR INTENDED TO
BE DELIVERED UNDER THIS AGREEMENT, AND THAT QI EXPLICITLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICUALR PURPOSE AND ALL
OTHER WARRANTIES, WHETHER ARISING BY STATUTE, OR OPERATION OF LAW, OR FROM A
COURSE OF DEALING, OR USAGE OF TRADE, OR OTHERWISE. FURTHER, QI EXPRESSLY DOES
NOT WARRANT THAT THE QI SOFTWARE, OR ANY PARTS THEREOF WILL BE ERROR FREE, WILL
OPERATE WITHOUT INTERRUPTION OR WILL BE COMPATIBLE WITH ANY HARDWARE OR SOFTWARE
POSSESSED OR TO BE POSSESSED BY LICESNSEE OR ANY END USERS.
15. LIMITATIONS OF LIABILITY. EXCEPT FOR LICENSEE'S BREACH OF SECTION 11(a),
NEITHER PARTY WILL BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF USE, INCIDENTAL,
INDIRECT, ECONOMIC, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF
ANY BREACH OR FAILURE UNDER THIS AGREEMENT, INCLUDING
Page 2 of 6
<PAGE>
[LOGO] SOFTWARE LICENSE AGREEMENT
16. THOSE ARISING FROM INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY
INTELLECTURAL PROPERTY RIGHT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. QI's sole and total liability and Licensee's sole remedy for any cause
of action shall be limited to the lesser of: (i) payments previously made by
Licensee to QI under this Agreement or (ii) one hundred thousand dollars
($100,000).
17. TERMINATION. QI shall have the right to automatically terminate this
Agreement and all licenses granted thereunder, immediately upon giving notice to
Licensee in the event that Licensee distributes the QI Software in a manner or
to a party not permitted hereunder, or if Licensee makes an assignment in
bankruptcy, is adjudicated a bankrupt, takes advantage of the insolvency laws of
any jurisdiction, makes an assignment for the benefit of creditors, is
dissolved, admits in writing its inability to pay debts as they become due, or
has a receiver or trustee appointed for its properties. QI may terminate this
Agreement upon thirty (30) days notice if Licensee breaches any other provisions
of this Agreement and fails to remedy the breach within such thirty (30) day
notice period. The following provisions survive termination or expiration of
this Agreement: Sections, 5,6,8,9,10,11,13, and 14.
18. GENERAL CONTRACT PROVISIONS.
(a) Any notice required under this Agreement shall be in writing and shall be
sufficiently given if delivered personally, or if transmitted by facsimile with
an original signed copy delivered personally within twenty-four hours
thereafter, or mailed by prepaid registered post addressed to QI or Licensee at
their respective addresses set forth at the beginning of this Agreement or at
such other then current address as is specified by notice.
(b) Neither this Agreement nor the license granted hereunder, are transferable
by the Licensee and any attempt by the Licensee to assign or transfer any of the
rights, duties or obligations hereunder is void.
(c) Both parties are independent contractors. Neither party will have the
authority to act for and or bind the other in any way, or to represent that
either is responsible for the acts of the other. Nothing herein will be
construed as forming a partnership or agency between the parties.
(d) Licensee hereby certifies that none of the QI Software or Improvements are
or will be intended for shipment, either directly or indirectly, to any country
in respect of which export restrictions or sanctions have been applied by the
Government of the United States. Licensee also agrees that it will obtain any
and all necessary export licenses.
(e) This agreement and all Schedules shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, and Licensee
hereby agrees to submit to the jurisdiction of the courts of the Commonwealth of
Pennsylvania notwithstanding any other provision expressed or implied in either
the Agreement or the Schedules.
(f) If any part of this Agreement is unenforceable because of any rule of law
or public policy, such unenforceable provision shall be severed from this
Agreement, and this severance shall not affect the remainder of this Agreement.
(g) Neither party shall be responsible to the other for non-performance or
delay in performance occasioned by any cause beyond its control. If any such
delay occurs then any applicable time period shall be automatically extended for
a period equal to the time lost, provided that the party affected makes
reasonable efforts to correct the reason for delay and gives to the other party
prompt notice of the delay.
QUADRANT INTERNATIONAL, INC. LICENSEE
- --------------------------- --------
By: _______________________________ By: ______________________________
Name: _____________________________ Name: ____________________________
Title: ____________________________ Title: ___________________________
Date: _____________________________ Date: ____________________________
Page 3 of 6
<PAGE>
[LOGO] SOFTWARE LICENSE AGREEMENT
SCHEDULE "A"
------------
1. QI SOFTWARE (list software to be provided, including version number, if
any):
________________________________________________________________________________
________________________________________________________________________________
to operate in conjunction with QI's (list QI's hardware product(s)):
________________________________________________________________________________
________________________________________________________________________________
2. TERRITORY
The license granted to Licensee is limited to the following geographic
territory:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
3. LICENSE FEES:
Licensee shall pay QI License Fees of per copy of the QI Software or
Improvement made by Licensee or provided to Licensee by QI under the terms of
this Agreement.
4. MINIMUM LICENSE PAYMENT:
Licensee agrees to purchase during each oneyear period covered by this Agreement
no less than copies of the QI Software or Improvement made by Licensee or
provided to Licensee by QI under the terms of this Agreement.
5. DOLBY LICENSEE FEES:
Licensee acknowledges that per unit Dolby license fees in the following amount
are in addition to the Licensee Fees referred to above:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
6. OTHER LICENSEE FEES:
Page 4 of 6
<PAGE>
[LOGO] SOFTWARE LICENSE AGREEMENT
Licensee acknowledges that the following per unit license fees in the following
amounts are in addition to the Licensee Fees referred to above:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
7. ADDITIONAL PROVISIONS:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE READ THIS LICENSE CAREFULLY BEFORE USING THE SOFTWARE. BY USING THE
SOFTWARE, YOU ARE AGREEING TO BE BOUND BY THE TERMS OF THIS LICENSE.
1. License. The software accompanying this License (hereinafter "Software"),
regardless of the media on which it is distributed, are licensed to you by
Quadrant International, Inc. ("QI") for use solely in conjunction with QI
hardware products purchased with the Software ("QI Hardware"). You own the
medium on which the Software is recorded, but QI and QI's Licensors (referred to
collectively as "QI") retain title to the Software and related documentation.
You may:
a) use the Software solely in conjunction with the QI Hardware on a single
computer;
b) make one copy of the Software in machine-readable form for backup purposes
only. You must reproduce on such copy QI's copyright notice and any other
proprietary legends that were on the original copy of the Software;
c) transfer all your license rights in the Software provided you must also
transfer a copy of this License, the backup copy of the Software, the QI
Hardware and the related documentation and provided the other party reads and
agrees to accept the terms and conditions of this License. Upon such transfer
your license is then terminated.
2. Restrictions. The Software contains copyrighted material, patented
material, trade secrets and or other proprietary material. In order to protect
them, and except as permitted by applicable legislation, you may not:
a) decompile, reverse engineer, disassemble or otherwise reduce the Software
to a human-perceivable form;
b) modify, network, rent, lend, loan, distribute or create derivative works
based upon the Software in whole or in part; or
c) electronically transmit the Software from one computer to another or over a
network or otherwise transfer the Software except as permitted by this License.
3. Termination. This License is effective until terminated. You may terminate
this License at any time by destroying the Software, related documentation and
all copies thereof. This License will terminate immediately without notice from
QI if you fail to comply with any provision of this License. Upon termination
you must destroy the Software, related documentation and all copies thereof.
4. Government End Users. If you are acquiring the Software on behalf of any
unit or agency of the United States Government, the following provisions apply.
The Government agrees the Software and documentation were developed at private
expense and are provided with "RESTRICTED RIGHTS". Use, duplication, or
disclosure by the Government is subject to restrictions as set forth in FAR
52.227-14, DFAR 252.227-7013, its successors or applicable agency rights in
technical data or computer software. In the event that this License, or any
part thereof, is deemed inconsistent with the minimum rights identified in the
Restricted Rights provisions, the minimum rights shall prevail.
5. No Other License. No rights or licenses are granted by QI under this
License, expressly or by implication, with respect to any proprietary
information or patent, copyright, trade secret or other intellectual property
right owned or controlled by QI, except as expressly provided.
6. Additional Licenses. DISTRIBUTION OR USE OF THE SOFTWARE WITH AN OPERATING
SYSTEM MAY REQUIRE ADDITIONAL LICENSES FROM THE OPERATING SYSTEM VENDOR.
Page 5 of 6
<PAGE>
[LOGO] SOFTWARE LICENSE AGREEMENT
7. Disclaimer of Warranty on Software. You expressly acknowledge and agree
that use of the Software is at your sole risk. The Software and related
documentation are provided "AS IS" and without warranty of any kind and QI
EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. QI DOES NOT WARRANTY THAT THE FUNCTIONS CONTAINED IN THE
SOFTWARE WILL MEET YOUR REQUIREMENTS, OR THAT THE OPERATION OF THE SOFTWARE WILL
BE UNINTURRUPTED OR ERROR-FREE, OR THAT DEFECTS IN THE SOFTWARE WILL BE
CORRECTED. THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF THE SOFTWARE IS
ASSUMED BY YOU. FURTHERMORE, QI DOES NOT WARRANT OR MAKE ANY REPRESENTATIONS
REGARDING THE USE OR THE RESULTS OF THE USE OF THE SOFTWARE OR RELATED
DOCUMENTATION IN TERMS OF THEIR CORRECTNESS, ACCURACY, RELIABILITY, CURRENTNESS,
OR OTHERWISE. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY QI OR QI'S
AUTHORIZED REPRESENTATIVE SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE
SCOPE OF THIS WARRANTY. SHOULD THE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT QI OR
QI'S AUTHORIZED REPRESENTATIVE) ASSUME THE ENTIRE COST OF ALL NECESSARY
SERVICING, REPAIR OR CORRECTION. THE SOFTWARE IS NOT INTENDED FOR USE IN
MEDICAL, LIFE SAVING OR LIFE SUSTAINING APPLICATIONS. SOME JURISDICTIONS DO NOT
ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY
TO YOU.
8. Limitation of Liability. UNDER NO CIRCUMSTANCES INCLUDING NEGLIGENCE,
SHALL QI, OR ITS DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, BE LIABLE TO YOU FOR
ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING DAMAGES
FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERUPTION, LOSS OF BUSINESS
INFORMATION, AND THE LIKE) ARISING OUT OF THE USE, MISUSE OR INABILITY TO USE
THE SOFTWARE OR RELATED DOCUMENTATION, BREACH OR DEFAULT, INCLUDING THOSE
ARISEING FROM INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY PATENT, TRADEMARK,
COPYRIGHT OR OTHER INTELLECTUAL PROPERY RIGHT, BY QI, EVEN IF QI OR QI'S
AUTHORIZED REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SOME JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY
NOT APPLY TO YOU. QI will not be liable for 1) loss of, or damage to, your
records or data or 2) any damages claimed by you based on any third party claim.
In no event shall QI's total liability to you for all damages, losses, and
causes of action (whether in contract, tort (including negligence) or otherwise)
exceed the amount paid by you for the Software.
9. Controlling Law and Severability. This License shall be governed by and
construed under the laws of the Commonwealth of Pennsylvania without reference
to its conflict of law principles. In the event of any conflicts between
foreign law, rules, and regulations, and United States law, rules, and
regulations, United States law, rules and regulations shall prevail and govern.
The United Nations Convention on Contracts for the International Sale of Goods
shall not apply to this License. If for any reason a court of competent
jurisdiction finds any provision of this License or portion thereof, to be
unenforceable, that provision of the License shall be enforced to the maximum
extent permissible so as to effect the intent of the parties, and the remainder
of this License shall continue in full force and effect.
10. Complete Agreement. This License constitutes the entire agreement between
the parties with respect to the use of the Software and the related
documentation, and supersedes all prior or contemporaneous understandings or
agreements, written or oral, regarding such subject matter. No amendment to or
modification of this License will be binding unless in writing and signed by a
duly authorized representative of QI.
CONFIRMATION OF MACROVISION LICENSE
Licensee also requests that the QI Software include functionality to enable the
display of DVD video via analogue TV out and therefore, Licensee represents and
warrants that it is a licensee of Macrovision Corporation ("Macrovision") and is
permitted under its license agreement with Macrovision to sell and distribute QI
software including such functionality. Licensee will indemnify, defend, and
hold QI, its subsidiaries, successors, officers, suppliers, directors and
employees harmless from any and all actions, causes of action, claims, demands,
costs, liabilities, expenses and damages, including reasonable attorneys' fees,
arising out of or in connection with Licensee's failure to obtain or maintain
licenses required by Macrovision.
LICENSEE
- --------
By:
Name:
Title:
Date:
Page 6 of 6
<PAGE>
EXHIBIT 10.12
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: QUADRANT INTERNATIONAL, INC.
ADDRESS: 269 GREAT VALLEY PARKWAY
MALVERN, PA 19365
DATE: JULY 14, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement
(the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount of
Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Silicon and are
not refundable.
1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its
sole discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon
harmless from any loss, cost, expense, or liability, including payments made by
Silicon, expenses, and reasonable attorneys'
<PAGE>
fees incurred by Silicon arising out of or in connection with any Letters of
Credit. Borrower agrees to be bound by the regulations and interpretations of
the issuer of any Letters of Credit guarantied by Silicon and opened for
Borrower's account or by Silicon's interpretations of any Letter of Credit
issued by Silicon for Borrower's account, and Borrower understands and agrees
that Silicon shall not be liable for any error, negligence, or mistake, whether
of omission or commission, in following Borrower's instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto. Borrower understands that Letters of Credit may require
Silicon to indemnify the issuing bank for certain costs or liabilities arising
out of claims by Borrower against such issuing bank. Borrower hereby agrees to
indemnify and hold Silicon harmless with respect to any loss, cost, expense, or
liability incurred by Silicon under any Letter of Credit as a result of
Silicon's indemnification of any such issuing bank. The provisions of this Loan
Agreement, as it pertains to Letters of Credit, and any other present or future
documents or agreements between Borrower and Silicon relating to Letters of
Credit are cumulative.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Silicon a security interest
in all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property*.
*EXCEPT FOR THE CREDIT FACILITY CURRENTLY IN PLACE WITH PROGRESS BANK WHICH
FACILITY WILL BE CONCURRENTLY PAID OFF WITH THE PROCEEDS OF LOANS UNDER THIS
AGREEMENT
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
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<PAGE>
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever *requested by Silicon, use its best
efforts to cause such third party to execute and deliver to Silicon, in form
*acceptable to Silicon, such waivers and subordinations as Silicon shall
specify, so as to ensure that Silicon's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any lease
of real property where any of the Collateral now or in the future may located.
*REASONABLY
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. *Borrower will advise Silicon in writing of any material loss
or damage to the Collateral.
*AS SOON AS PRACTICABLE, BUT IN NO EVENT TO EXCEED 24 HOURS,
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will* accurately reflect the financial condition of Borrower, at the
times and for the periods therein stated. Between the last date covered by any
such statement provided to Silicon and the date hereof, there has been no
material adverse change in the financial condition or business of Borrower.
Borrower is now and will continue to be solvent.
*, IN ALL MATERIAL RESPECTS,
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. * or
adjustments proposed for any of Borrower's prior tax years which could result in
additional taxes becoming due and payable by Borrower. Borrower has paid, and
shall continue to pay all amounts necessary to fund all present and future
pension, profit sharing and deferred compensation plans in accordance with their
terms, and Borrower has not and will not withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any such plan which could result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency. Borrower shall, at all times,
utilize the services of an outside payroll service providing for the automatic
deposit of all payroll taxes payable by Borrower.
*NO NOTICE HAS BEEN RECEIVED BY BORROWER, NOR IS BORROWER AWARE, OF ANY
PENDING NOTICE
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
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<PAGE>
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Silicon transaction reports and loan requests, schedules and
assignments of all Receivables, and schedules of collections, all on Silicon's
standard forms; provided, however, that Borrower's failure to execute and
deliver the same shall not affect or limit Silicon's security interest and other
rights in all of Borrower's Receivables, nor shall Silicon's failure to advance
or lend against a specific Receivable affect or limit Silicon's security
interest and other rights therein. Loan requests received after 12:00 Noon will
not be considered by Silicon until the next Business Day. Together with each
such schedule and assignment, or later if requested by Silicon, Borrower shall
furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial balance
in such form and at such intervals as Silicon shall request. In addition,
Borrower shall deliver to Silicon the originals* of all instruments, chattel
paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, immediately upon receipt thereof and in
the same form as received, with all necessary endorsements, all of which shall
be with recourse. Borrower shall also provide Silicon with copies of all credit
memos within two days after the date issued.
*(OR COPIES AS DETERMINED BY SILICON IN ITS OWN DISCRETION)
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account"
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<PAGE>
as Silicon may specify, pursuant to a blocked account agreement in such form as
Silicon may specify. Silicon or its designee may, at any time, notify Account
Debtors that the Receivables have been assigned to Silicon.
4.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred*, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
*AND IS CONTINUING
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default,* settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
*WHICH EVENT OF DEFAULT IS CONTINUING,
4.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default*, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
*AND WHILE SUCH EVENT OF DEFAULT IS CONTINUING,
4.8 VERIFICATION. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance
-5-
<PAGE>
is, at all times, in full force and effect. All such insurance policies shall
name Silicon as an additional loss payee, and shall contain a lenders loss payee
endorsement in form reasonably acceptable to Silicon. Upon receipt of the
proceeds of any such insurance, Silicon shall apply such proceeds in reduction
of the Obligations as Silicon shall determine in its sole discretion, except
that, provided no Default or Event of Default has occurred and is continuing,
Silicon shall release to Borrower insurance proceeds with respect to Equipment
totaling less than $100,000, which shall be utilized by Borrower for the
replacement of the Equipment with respect to which the insurance proceeds were
paid. Silicon may require reasonable assurance that the insurance proceeds so
released will be so used. If Borrower fails to provide or pay for any insurance,
Silicon may, but is not obligated to, obtain the same at Borrower's expense.
Borrower shall promptly deliver to Silicon copies of all reports made to
insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on
one Business Day's notice, Silicon, or its agents, shall have the right to
inspect the Collateral and the right to audit and copy Borrower's books and
records. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have the
right to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower's business, and except for the sale of obsolete or
unneeded Equipment in the ordinary course of business; (v) store any Inventory
or other Collateral with any warehouseman or other third party; (vi) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent
basis; (vii) make any loans of any money or other assets; (viii) incur any
debts, outside the ordinary course of business, which would have a material,
adverse effect on Borrower or on the prospect of repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations of
another party or entity; (x) *pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower); (xi) *redeem,
retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's
stock; (xii) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or (xiii) pay total compensation, including salaries, fees,
bonuses, commissions, and all other payments, whether directly or indirectly, in
money or otherwise, to Borrower's executives, officers and directors (or any
relative thereof) in an amount in excess of the amount set forth on the
Schedule; or (xiv) dissolve or elect to dissolve. Transactions permitted by the
foregoing provisions of this Section are only permitted if no Default or Event
of Default would occur as a result of such transaction.
*EXCEPT AS REQUIRED BY BORROWER'S ARTICLES OF INCORPORATION IN EFFECT ON
THE DATE HEREOF, AS AMENDED FROM TIME TO TIME (CERTIFIED COPIES OF ALL
AMENDMENTS TO THE ARTICLES OF INCORPORATION ADOPTED BY THE BORROWER AFTER THE
DATE HEREOF SHALL BE PROVIDED TO SILICON PROMPTLY, BUT IN NO EVENT WITHIN 15
DAYS AFTER SUCH AMENDMENT HAS BEEN FILED WITH THE SECRETARY OF THE
COMMONWEALTH),
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<PAGE>
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to* of the Maximum Credit Limit**. The termination fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the highest rate applicable to any of the Obligations.
*ONE-HALF OF ONE PERCENT (0.50%)
**PROVIDED, HOWEVER, NO SUCH TERMINATION FEE SHALL BE CHARGED IF THE CREDIT
FACILITY HEREUNDER IS REPLACED WITH A NEW FACILITY FROM ANOTHER LENDING DIVISION
OF SILICON VALLEY BANK
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
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within 5 Business Days after the date due; or (f) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (h)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition; or (i) Dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n) there shall be a change in
the record or beneficial ownership of an aggregate of more than 20% of the
outstanding shares of stock of Borrower, in one or more transactions, compared
to the ownership of outstanding shares of stock of Borrower in effect on the
date hereof, without the prior written consent of Silicon;* or (o) Borrower
shall generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be a material adverse change in Borrower's business or
financial condition; or (q) Silicon, acting in good faith and in a commercially
reasonable manner, deems itself insecure because of the occurrence of an event
prior to the effective date hereof of which Silicon had no knowledge on the
effective date or because of the occurrence of an event on or subsequent to the
effective date. Silicon may cease making any Loans hereunder during any of the
above cure periods, and thereafter if an Event of Default has occurred.
* EXCEPT FOR THE CONVERSION OF THE WARRANT OF CLASS B CONVERTIBLE PREFERRED
STOCK INTO COMMON STOCK
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one or
more of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the
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<PAGE>
Collateral and make it available to Silicon at places designated by Silicon
which are reasonably convenient to Silicon and Borrower, and to remove the
Collateral to such locations as Silicon may deem advisable; (e) Complete the
processing, manufacturing or repair of any Collateral prior to a disposition
thereof and, for such purpose and for the purpose of removal, Silicon shall have
the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment
and all other property without charge; (f) Sell, lease or otherwise dispose of
any of the Collateral, in its condition at the time Silicon obtains possession
of it or after further manufacturing, processing or repair, at one or more
public and/or private sales, in lots or in bulk, for cash, exchange or other
property, or on credit, and to adjourn any such sale from time to time without
notice other than oral announcement at the time scheduled for sale. Silicon
shall have the right to conduct such disposition on Borrower's premises without
charge, for such time or times as Silicon deems reasonable, or on Silicon's
premises, or elsewhere and the Collateral need not be located at the place of
disposition. Silicon may directly or through any affiliated company purchase or
lease any Collateral at any such public disposition, and if permissible under
applicable law, at any private disposition. Any sale or other disposition of
Collateral shall not relieve Borrower of any liability Borrower may have if any
Collateral is defective as to title or physical condition or otherwise at the
time of sale; (g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Silicon to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Silicon's
sole discretion, to grant extensions of time to pay, compromise claims and
settle Receivables and the like for less than face value; (h) Offset against any
sums in any of Borrower's general, special or other Deposit Accounts with
Silicon; and (i) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto. All reasonable attorneys' fees, expenses, costs,
liabilities and obligations incurred by Silicon with respect to the foregoing
shall be added to and become part of the Obligations, shall be due on demand,
and shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Without limiting any of Silicon's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional four
percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general, non-
specific terms; (iii) The sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 POWER OF ATTORNEY. *without limiting Silicon's other rights and
remedies, Borrower grants to Silicon an irrevocable power of attorney coupled
with an interest, authorizing and permitting Silicon (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to do
any or all of the following, in Borrower's name or otherwise, but Silicon agrees
to exercise the following powers in a commercially reasonable manner: (a)
Execute on behalf of Borrower any documents that Silicon may, in its sole
discretion, deem advisable in order to perfect and maintain Silicon's security
interest in the Collateral, or in order to exercise a right of Borrower or
Silicon, or in order to fully consummate all the transactions contemplated under
this Agreement, and all other present and future agreements; (b) Execute on
behalf of Borrower any document exercising, transferring or assigning any option
to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any
real or personal property which is part of Silicon's Collateral or in which
Silicon has an interest; (c) Execute on behalf of Borrower, any invoices
relating to any Receivable, any draft against any Account Debtor
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and any notice to any Account Debtor, any proof of claim in bankruptcy, any
Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment
or satisfaction of mechanic's, materialman's or other lien; (d) Take control in
any manner of any cash or non-cash items of payment or proceeds of Collateral;
endorse the name of Borrower upon any instruments, or documents, evidence of
payment or Collateral that may come into Silicon's possession; (e) Endorse all
checks and other forms of remittances received by Silicon; (f) Pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim in or
to any of the Collateral, or any judgment based thereon, or otherwise take any
action to terminate or discharge the same; (g) Grant extensions of time to pay,
compromise claims and settle Receivables and General Intangibles for less than
face value and execute all releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure the
release of any liens therefor, or both; (i) Settle and adjust, and give releases
of, any insurance claim that relates to any of the Collateral and obtain payment
therefor; (j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Silicon the same rights
of access and other rights with respect thereto as Silicon has, under this
Agreement; and (k) Take any action or pay any sum required of Borrower pursuant
to this Agreement and any other present or future agreements. Any and all
reasonable sums paid and any and all reasonable costs, expenses, liabilities,
obligations and attorneys' fees incurred by Silicon with respect to the
foregoing shall be added to and become part of the Obligations, shall be payable
on demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations. In no event shall Silicon's rights under
the foregoing power of attorney or any of Silicon's other rights under this
Agreement be deemed to indicate that Silicon is in control of the business,
management or properties of Borrower.
*PROVIDED AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING,
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Silicon shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its
sole discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies accorded
a secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both,
-------
would constitute an Event of Default.
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"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Inventory" means Inventory which Silicon, in its sole judgment,
------------------
deems eligible for borrowing, based on such considerations as Silicon may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Silicon's
discretion, Inventory which does not meet the following requirements will not be
deemed to be Eligible Inventory: Inventory which (i) consists of finished goods,
in good, new and salable condition which is not perishable, not obsolete or
unmerchantable, and is not comprised of raw materials, work in process,
packaging materials or supplies; (ii) meets all applicable governmental
standards; (iii) has been manufactured in compliance with the Fair Labor
Standards Act; (iv) conforms in all respects to the warranties and
representations set forth in this Agreement; (v) is at all times subject to
Silicon's duly perfected, first priority security interest; and (vi) is situated
at a one of the locations set forth on the Schedule.*
*WITHOUT LIMITING THE FACT THAT THE DETERMINATION OF WHICH INVENTORY IS
ELIGIBLE FOR BORROWING IS A MATTER OF SILICON'S DISCRETION, INVENTORY WHICH IS
ACQUIRED FROM SOLECTRON WILL NOT BE DEEMED TO BE ELIGIBLE INVENTORY UNTIL SUCH
TIME AS ALL LIENS FILED IN FAVOR OF SOLECTRON, IF ANY, ARE TERMINATED. UPON SUCH
TERMINATION, WHICH INVENTORY ACQUIRED FROM SOLECTRON IS DEEMED ELIGIBLE FOR
BORROWING, IF ANY, SHALL BE DETERMINED BY SILICON IN ITS SOLE DISCRETION.
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
-------
Eligibility Requirements") are the minimum requirements for a Receivable to be
- ------------------------
an Eligible Receivable: (i) the Receivable must not be outstanding for more than
90 days from its invoice date, (ii) the Receivable must not represent progress
billings, or be due under a fulfillment or requirements contract with the
Account Debtor, (iii) the Receivable must not be subject to any contingencies
(including Receivables arising from sales on consignment, guaranteed sale or
other terms pursuant to which payment by the Account Debtor may be conditional),
(iv) the Receivable must not be owing from an Account Debtor with whom the
Borrower has any dispute (whether or not relating to the particular Receivable),
(v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the
Receivable must not be owing from an Account Debtor which is subject to any
insolvency or bankruptcy proceeding, or whose financial condition is not
acceptable to Silicon, or which, fails or goes out of a material portion of its
business, (vii) the Receivable must not be owing from the United States or any
department, agency or instrumentality thereof (unless there has been compliance,
to Silicon's satisfaction, with the United States Assignment of Claims Act),
(viii) the Receivable must not be owing from an Account Debtor located outside
the United States or Canada (unless pre-approved by Silicon in its discretion in
writing, or backed by a letter of credit satisfactory to Silicon, or FCIA
insured satisfactory to Silicon), (ix) the Receivable must not be owing from an
Account Debtor to whom Borrower is or may be liable for goods purchased from
such Account Debtor or otherwise. Receivables owing from one Account Debtor
will not be deemed Eligible Receivables to the extent they exceed 25% of the
total eligible Receivables outstanding*. In addition, if more than 50% of the
Receivables owing from an Account Debtor are outstanding more than 90 days from
their invoice date (without regard to unapplied credits) or are otherwise not
eligible Receivables, then all Receivables owing from that Account Debtor will
be deemed ineligible for borrowing. Silicon may, from time to time, in its
discretion, revise the Minimum Eligibility Requirements, upon written notice to
the Borrower.
*PROVIDED, HOWEVER, THAT WITH RESPECT TO RECEIVABLES FOR WHICH DELL
COMPUTER IS THE ACCOUNT DEBTOR, SUCH PERCENTAGE SHALL BE (I) 75% DURING THE
FIRST 180 DAYS OF THIS AGREEMENT AND (II) 50% THEREAFTER
"Equipment" means all of Borrower's present and hereafter acquired
---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
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"General Intangibles" means all general intangibles of Borrower, whether
-------------------
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security
---------------
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Silicon, which consent shall not
be unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other
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security therefor, all merchandise returned to or repossessed by Borrower, and
all rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as
--------
Silicon may from time to time establish and revise in good faith reducing the
amount of Loans and Letters of Credit which would otherwise be available to
Borrower under the lending formula(s) provided in the Schedule: (a) to reflect
events, conditions, contingencies or risks which, as determined by Silicon in
good faith, do or may affect either (i) the Collateral or any other property
which is security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three business days Business
Days after receipt by Silicon of immediately available funds, and, for purposes
of the foregoing, any such funds received after 12:00 Noon* on any day shall be
deemed received on the next Business Day. Silicon shall not, however, be
required to credit Borrower's account for the amount of any item of payment
which is unsatisfactory to Silicon in its sole discretion, and Silicon may
charge Borrower's loan account for the amount of any item of payment which is
returned to Silicon unpaid.
*PACIFIC STANDARD TIME
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, or at the expiration of one Business
Day following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
-13-
<PAGE>
final, entire and complete agreement between Borrower and Silicon and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
---------
no oral understandings, representations or agreements between the parties which
- -------------------------------------------------------------------------------
are not set forth in this Agreement or in other written agreements signed by the
- --------------------------------------------------------------------------------
parties in connection herewith.
- ------------------------------
9.8 WAIVERS. The failure of Silicon at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Silicon shall not waive
or diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Silicon, or
any of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon, but nothing herein shall relieve
Silicon from liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
-----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
- --------------------------------------------------------------------
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
- --------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
- ------------------------------------------------------------------------------
only Silicon and not Borrower in connection with this Agreement. If either
- ---------------------------------------------------------------
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees
and costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Silicon; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void.
-14-
<PAGE>
No consent by Silicon to any assignment shall release Borrower from its
liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against Silicon, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Silicon, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
-15-
<PAGE>
Borrower:
QUADRANT INTERNATIONAL, INC.
By: /s/ Francis S. Wilde
--------------------
President or Vice President
By: /s/ Jason Liu
--------------------
Secretary or Ass't Secretary
Silicon:
SILICON VALLEY BANK
By: /s/ Milad Hanna
--------------------
Title: Vice President
------------------
-16-
<PAGE>
Exhibit 10.13
Commercial Rental Agreement
---------------------------
Contract number: 130.0005 from October 18, 1995
Between Deutsche-Bemanten-
Lebensversicherung AG/1/
Frankfurter Strasse 50
65178 Wiesbaden
- Landlord -
and VIONA Development Soft- and
Hardware Engineering GmbH i.G./2/
Karlsruhe
represented by the managers:
- Tenant -
have concluded the following lease:
I. Leased rooms
The rooms in the building at Karlstrasse 27,
Karlsruhe, on the 5th floor/3/ are being leased
for the exclusive use as office rooms.
The leased area of 109 square meters has been agreed to.
For utilities and elevator-related expenses, the
basis of 109 square meters has been agreed to.
The leased area has been outlined in red on the
attached floor plans.
II. Furnishing and equipment of the leased rooms
The leased rooms are being transferred to the
tenant in a professionally renovated state at the
start of the lease period.
III. Term of lease
The lease relationship will begin on: January 1, 1996.
The term of the lease will end on: December 31, 2000.
If the lease relationship is not otherwise terminated
at least 6 months prior to its expiration, then it
will be automatically lengthened by 12 months.
/2
- ---------------------
/1/ Translator's Note: I gave the English translation of companies' names on the
cover sheet.
/2/ Translator's Note: GmbH, "limited liability company"; i.G. designates a
company whose official registration is pending, here lined out by hand
because the certification was completed.
/3/ Translator's Note: German stories are numbered such that the first floor
above ground level is 1, whereas in the United States the same floor is
usually numbered 2. I have translated all stories following American
convention.
<PAGE>
- 2 -
The landlord will grant the tenant an option, beyond December 31, 2000,
for the purpose of continuing the lease relationship for the duration of 5
years. The option can be exercised in writing by the tenant only up to 6
months before December 31, 2000.
IV. Lease
1. The monthly basic lease currently is DM 1,526.00
2. Additional monthly operational cost
prepayments ((S) 6 AVG/4/) currently DM 340.00
3. Additional monthly elevator-related
prepayments ((S) 7 AVG) currently DM 100.00
-- ------
Total lease per month currently DM 1,966.00
== ========
Applicable value-added tax
currently 15% DM 294.90
-- ------
Total monthly payment currently DM 2,260.00
===========
The tenant authorizes the landlord to debit payments due under this
contract from account number
at (bank code number
account holder:
in the debit process.
The payments due under this contract are to be credited solely to account
number 7131600 at Commerzbank Wiesbaden AG (bank code number 510 400 38).
V. Changes in lease
The basic lease agreed to in IV. shall be raised as follows:
starting on January 1, 1997 from DM 1,526.00 to DM 1,744.00
If the index of a four-person household of blue-collar and white-collar
workers with a mid-level income (basis year 1985 = 100) should change by
more than 10 points upward or downward with respect to the status of
January 1, 1997, and/or with respect to the state of the applicable most-
recent reevaluation of the lease rate set by the Federal Bureau of
Statistics in Wiesbaden, then either party to this contract can demand an
adjustment in the same relationship, specifically, from the start of the
calendar year that follows the month the application is submitted.
/3
- ---------------------
/4/ Translator's Note: AVG refers to the "The General Contractual Agreements for
Commercial Leases."
<PAGE>
- 3 -
If, on the basis of a preexisting value-assurement clause, an adjustment
of the lease rate has taken place, the rule for further changes in the
price index for lifestyle by more than 10 points, respectively, is again
applicable, always with reference to the index which had application in
the month of the last lease adjustment.
The parties to this contract are aware that this clause requires approval
from the LZB/5/ responsible. The tenant authorizes the landlord as of now
to obtain this approval.
If, on the basis of an update by the Federal Bureau of Statistics, the
basis year for the lifestyle cost index is introduced or if the
aforementioned lifestyle cost index is replaced by another comparable
index, then the respective index applies for the lease adjustment on the
basis of the new basis year and/or of the new index. For the time up to
the next adjustment deadline, the old index will continue to apply--if
necessary after the resetting of the basis.
VI. Lease security deposit
The tenant will provide a lease security deposit in the amount of DM
10,000.00 (in words: ten thousand German marks) with a bank acting as
guarantor.
VII. Other agreements
a) When splitting any elevator-related operational expenses, the tenants
on the ground floor will be excluded.
b) The landlord is not obligated nor authorized to insure mirrors, glass
panes, and awnings at the expense of the tenants.
VIII. The General Contractual Agreements for Commercial Leases (AVG) and the
Building Code are integral components of this commercial lease. The
tenant confirms that he or she has received these.
Attachments: Floor plan
Wiesbaden, October 18, 1995 Karlsruhe, December 6, 1995
Deutsche Beamten
Lebensversicherung AG
[illegible signature] [illegible signature]
..................... .....................
- Landlord - - Tenant -
- --------------------
/5/ Translator's Note: unknown designation.
<PAGE>
I. Amendment to the Commercial Lease No. 130.0005 from October 18, 1995
Between Deutsche
Beamten Lebensversicherung
Aktiengesellschaft
Frankfurter Strasse 50
65 178 Wiesbaden
- Landlord -
and VIONA
Development GmbH
Soft- and Hardware Engineering GmbH
Karlstrasse 27
76133 Karlsruhe
- Tenant -
regarding office rooms in the building at Karlstrasse 27, Karlsruhe
In the amendment to the lease, the following agreements have been reached:
1. Tentatively as of October 1, 1996, the tenant will also take over, in
addition to the area already in use on the 5th floor with 109 square
meters, the office rooms on the 4th floor with an agreed use area of 135
square meters in professionally renovated state.
2. The total monthly payments as of October 1, 1996, tentatively, at the
latest from the point in time of transfer, will be calculated as follows:
1. the basic monthly rent will amount currently to DM 3,416.00
2. additional monthly operational cost prepayments
((S) 6 AVG) currently DM 700.00
3. additional monthly elevator-related prepayment
((S) 7 AVG) currently DM 230.00
---------
total rent per month DM 4,346.00
additional applicable value-added tax currently 15% DM 651.90
total monthly payment currently DM 4,997.90
-----------
3. The agreed rent increases in stages in accordance with Point V of the
rental contract from January 1, 1997, will be stricken. The rental rate
adjustment in accordance with the lifestyle cost index will begin with the
status on January 1, 1996.
<PAGE>
4. The rental security deposit for both floors will be set to DM 12,000.00
altogether and can take place via exchange of the already existing
guarantor client over DM 10,000.00.
5. The estimated cost of the building administration in accordance with (S) 6
AVG is agreed to with 2% of the basic rent.
6. All other agreements of the rental contract from October 18, 1995, will
remain fully unchanged.
Wiesbaden, September 18, 1996 Karlsruhe, September 25, 1996
[illegible signature] [illegible signature]
- --------------------- ---------------------
Deutsche VIONA
Beamten lebensversicherung Development GmbH
Aktiengesellschaft
- - Landlord - - Tenant -
VIONA HARD- & SOFTWARE
ENGINEERING GMBH
Karlstrasse 27
D-76133 Karlsruhe
[illegible]
<PAGE>
2. Amendment to Commercial Rental Agreement No. 130.0005 of October 18, 1995
- -------------------------------------------------------------------------------
Between DBV Winterthur Lebensversicherung
Aktiengesellschaft
Frankfurter Strasse 50
65178 Wiesbaden
- Landlord -
and VIONA Development
Hard- and Software Engineering GmbH
KARLSTRASSE 27
76133 KARLSRUHE
- Tenant -
regarding Office rooms in the building at Karlstrasse 27, Karlsruhe
---------------------------------------------------------
1. Rental agreement no. 130.0002 from August 10, 1998, regarding the second
floor will end on March 31, 1999.
2. On April 1, 1999, the tenant will also take over the second floor with an
office area of 135 square meters in addition to the area already in use on
the 5th floor with 135 square meters and the 6th floor with 105 square
meters.
3. The total monthly payments will be calculated as of April 1, 1999, as
follows:
basic rent currently DM 5,740.00
additional operational cost prepayments DM 1,150.00
additional elevator-related prepayments DM 360.00
-----------
DM 7,250.00
additional applicable value-added tax,
currently 16% DM 1,160.00
-----------
total monthly payment currently DM 8,410.00
===========
4. In amendment to point V. (Changes in rent) of the rental contract, the
price index for the lifestyle of all private households for Germany (basis
year 1991 = 100) will serve as basis.
The rent adjustments in accordance with the lifestyle cost index will
begin with the status of January 1996. Upon the first increase of the
rental rate, a basic rent of DM 14.00 per square meter will be the
starting point. For successive rent rates, the basic rent per square
meter resulting from the preceding rent rate increase will be the starting
point.
5. In amendment to point III (Rental duration), the rental relationship will
be extended by 10 years. Thus, the rental period will end on March 31,
2009.
<PAGE>
If the rental relationship is not otherwise terminated at least 12 months
before its expiration, then it will be extended each time by 12 months.
6. The rental security deposit for the total area of 379 square meters will
be set at DM 20,000.00 and can be provided via exchange of the already
existing guarantor client over DM 12,000.00.
7. The estimated price for building administration in accordance with (S) 6
AVG is agreed to at 3 % of the basic rent.
8. All other conditions of the rental contract as well as amendments will
retain their validity.
-------------------------------------
Wiesbaden, March 12, 1999 Karlsruhe,
DBV Winterthur Lebensversicherung
Aktiengesellschaft
VIONA HARD- & SOFTWARE
ENGINEERING GMBH & CO KG
Karlstrasse 27, 76135 Karlsruhe
Tel. 0721-913-148
Fax 0721-913-44-99
[illegible signature] [illegible signature]
..................... .....................
- Landlord - - Tenant -
<PAGE>
General Contractual Agreements Commercial Rental Agreement (AVG)
(S) 1a Transfer of prepared rental rooms
1. The landlord will transfer to the tenant the rental rooms at the start of
the rental period.
2. The landlord will not guarantee, however, that the rental rooms will have
been cleared by third parties by the start of the rental period, unless
the damages incurred by the tenant because of this touch on any
intentional or grossly negligent violation of this contract on the part of
the landlord. The right to withdraw from the contract on the part of the
tenant will remain untouched by this.
3. The state of the rental rooms at the point in time of the transfer will be
set forth, if necessary, in a damage report. Deficiencies in the rental
space can be made valid by the tenant only if they are identified at the
time of the rental rooms' transfer and their confirmation is confirmed in
writing. Insubstantial deficiencies and any residual work do not authorize
the tenant to refuse accepting the transfer of the rental rooms.
4. The landlord will turn over to the tenant the required keys. The
acquisition of additional keys by the tenant requires the approval of the
landlord.
If a key is lost, the tenant has the right to demand a replacement key at
the cost of the landlord and to have the required number of keys made. If
the lock needs to be replaced entirely or in part because of security
reasons, the landlord bears the costs resulting therefrom.
(S) 1b Transfer of not-yet prepared rental rooms
1. If the start of the rental period cannot be determined in a binding
fashion at the time of concluding the contract, then it will begin on the
date of the deadline for completion of any building-related work regarding
which the landlord will provide information, on which date the rental
rooms have been prepared in accordance with the building and equipment
description and can be transferred. From this point in time on, the rent
is to be paid regardless of any not-yet finished division or other work,
if necessary, which the tenant may undertake for his or her rental rooms,
and/or services that the landlord can provide only after the tenant has
finished renovations.
2. If upon transfer of the rental rooms there are parts of the total object
that are not yet ready, the tenant may not derive any rights from this; he
or she is in particular not authorized to refuse to accept transfer
insofar as this does not substantially impinge upon the contract-related
use of the rental rooms.
3. The state of the rental rooms at the point in time that they are
transferred will be set out in the damage report. Deficiencies in the
rental space can be made valid by the tenant only if they were identified
at the time the rental rooms were transferred and their correction was
agreed to in writing. Insubstantial deficiencies
<PAGE>
- 2 -
and residual work do not authorize the tenant to refuse to accept transfer
of the rental rooms.
4. (S) 1a No. 4 applies as applicable.
(S) 2 Use of the rental rooms and of community property
1. The rental rooms have been rented only for the use as agreed to.
2. The landlord does not guarantee that the rental rooms are suitable for
that use nor that they conform to technical and official specifications.
If there are no correctable, legal, or actual restrictions that are
founded in the person of the tenant with respect to the agreed use, then
the tenant has the right to withdraw from the contract. Official approvals
are to be obtained by the tenant. The costs of the use inspection, the
official approvals, and the fulfillment of production including the
acquisition or disposal of parking spaces will be borne by the tenant.
3. The landlord guarantees no competitive or assortment protection. He or she
is in particular not liable for the fact that whole or partial overlap
with competitors exists with other tenants now or in the future.
4. Operational obligations are incumbent on the tenant in restaurants and
pubs during legal business hours insofar as deviating business hours are
not otherwise determined by the landlord.
5. Store facilities, ware presentation, and display window decorations must
be done in a fashion that is suitable for the area of business and the
location of the contractual object. The landlord is authorized to
determine the length of time that lighting may be on for display windows.
The setup and operation of game machines requires the previously written
approval of the landlord.
6. Sellouts and clearance sales require the previous written approval of the
landlord.
7. The delivery of wares for the rental object must take place with respect
to time of day and to delivery method such that no impingement on other
tenants is possible.
No objects and products may be stored or sold outside of the leased areas.
8. The tenant is liable for any legally permissible level of construction-
related burden on floor coverings being exceeded.
9. The elevators will be kept operational during those periods of
<PAGE>
- 3 -
time set by the landlord; however, the tenant does not have a right to
uninterrupted service.
10. Insofar as parking places are provided for free, the landlord will retain
the right to enforce another rule (e.g. parking fees, gates) upon which
changes the tenant may not base any claims.
The tenant is obligated to be connected to a parking fee reimbursement, if
necessary.
It is open to the landlord--and with his or her approval to third parties
as well (e.g. an advertising company)--to claim any areas not belonging to
the rented area (e.g. parking areas, passages, and/or other attached
areas) for special events or other purposes that may appear to the
landlord to be appropriate in the interest of the contractual object.
11. The cleaning of the traffic areas (e.g. footpaths, stairwells, basement
rooms, etc.) and of the community property (e.g. elevators) is incumbent
on the tenant. On this point, he or she must adhere to the regulations of
the local police.
The landlord is authorized to have such work performed for the tenant and
to bill the tenant for the costs arising from this.
12. The landlord is authorized to control the operation of the community
property in a use ordinance. He or she will endeavor to keep community
property in working order for the time being and to correct any
disruptions immediately. If a piece of community property cannot be used
temporarily, the tenants will have a right to reimbursement for damages
only in the case of intentional or grossly negligent action on the part of
the landlord.
With respect to the interests and requirements of the tenant, the landlord
may remove, change, or acquire new community property; this also applies
to any buildings that may be added on to the broad-band cable network of
the German Federal Post Office. The landlord can bill the costs for this
to the tenants.
13. The use of traffic areas and community property can be reregulated by the
landlord.
(S) 3 Sublets, building-related changes by the tenant, advertising
1. The tenant is authorized only with previous written permission from the
landlord to withdraw from rights under the rental agreement or to sublet
the rental rooms wholly or partially to third parties. This also applies
to a change in ownership due to change in the legal form of the company.
<PAGE>
- 4 -
The landlord can make his or her approval for any sublet dependent on an
appropriate increase in the basic rent.
If the landlord refuses to approve the sublet, the tenant has no right to
terminate the contract.
In the event that subletting occurs, the tenant will immediately defer all
rights against the third party to the landlord.
2. Building-related changes to the rental rooms by the tenant require the
previous written approval of the landlord. Official permits will be
obtained by the tenant.
All production and cost requirements--stemming from the construction-
related costs predicted by and/or taken by the tenant or from the use of
the rental rooms--from third parties (in particular local authorities,
suppliers, etc.) must be followed through on by the tenant and/or must be
billed to him or her. The tenant will leave open to the landlord the
fulfillment of any such production and cost requirements, including
acquisition or disposal of parking places.
3. Roof and facade areas of the building, as well as wall areas on the inside
of the building outside of the rental rooms, have not been rented out.
They may be used by the tenant, only after getting prior written approval
from the landlord, for advertising purposes or for attaching directional
signs.
The tenant may attach company signs at his or her own expense only to
areas previously approved by the landlord. Size and form of the signs must
be conferred in advance with the landlord.
The tenant is obligated to use collective signs facilities and to share
proportionately in the costs.
Labels, signs, advertisements, and such may be attached to windows only if
the landlord has previously approved of this.
If the landlord grants permission for the foregoing measures, number 2,
paragraphs 2 through 4 (S) 13 number 2 of the AVG apply, correspondingly.
Acoustic presentations that can be heard outside the rental rooms require
the prior approval of the landlord.
(S) 4 Invoicing, reduction, damage reimbursement
1. The tenant can withhold payment with respect to rental requirements only
if his or her demands are uncontested or have been found to be legally
valid and if he or she notified the landlord at least one month before the
due date
<PAGE>
- 5 -
of the rent in writing.
2. The reduction of the basic rent is not possible if the tenant must endure
the impingement or if the impingement is not due to the landlord or if the
fitness of the rental object for contractual use is only insignificantly or
temporarily limited.
3. The landlord is liable only for the damages incurred by the tenant,
regardless of whether this is due to a deficiency in the rental object that
already existed at the time of transfer, a deficiency that appeared only
later, or whether the landlord is in delay of correcting the deficiency
(unless the landlord has caused the damage intentionally or through gross
negligence, or unless the deficiency was kept quiet deceptively by the
tenant, or unless an assured characteristic is affected).
4. The landlord provides no guarantee for uninterrupted operation of equipment
of the rental object.
(S) 5 Rent
1. Insofar as the tenant does not participate in a bank debit procedure, the
rent must be paid every month in advance, at the latest on the third
business day of the month, under identification via the
Rental Agreement Number
and paid into the indicated account of the landlord without additional
expense.
With respect to determining punctuality of payment, not the sending but
the receipt of the money (credit to the account) shall apply.
If the tenant is in arrears of payment of rent, the landlord is
authorized to apply a late fee. Here, the landlord is authorized to charge
a late fee in the amount of 4 % above the current annual discount rate.
The landlord may, as he or she may decide, calculate payments based on
costs and interest rates up to now or based on the oldest status. This
also applies if the tenant has found another condition.
2. If the landlord declares him- or herself subject to value-added tax after
the contract has been concluded then, in addition to rent, the value-added
tax due must be paid by the tenant (if the tenant is an enterprise in the
sales tax-related sense).
3. Operational, elevator-related, and hot water-related cost prepayments will
be calculated once per year. The tenant is authorized, within 6 months of
access to the
<PAGE>
- 6 -
invoicing, to see the invoice documents and to raise objections in writing
against the claim. If within the time limit no objections are raised, the
invoice will apply as valid.
If measuring or reading equipment should fall out of use or be impinged
from proper functioning, or if for other compelling reasons the heating and
hot-water usage cannot be determined in an official way, the cost
distribution will take place as explained under (S) 9a of the Heating Cost
Calculation Ordinance.
The landlord can adjust the prepayments to be made by the tenant to the
actual cost changes.
If the tenant withdraws during an invoice period, there can be no claim
to premature invoicing. The cost distribution will take place in
accordance with the measure of (S) 9b of the Heating Cost Invoice
Ordinance. The costs for the intermediary readings are to be borne by the
tenant.
(S) 6 Operational costs
1. Operational costs are those costs that arise on a continual basis for the
landlord through ownership of the plot of land or through zoning-approved
use of the building or of the business unit, side buildings, facilities,
equipment, and the land:
- The total running public burdens of property, building, and business
unit, property tax, garbage removal, chimney cleaning, canalization,
water, and sewage.
- Insurance for property, building, and business unit against fire,
storms, water damages, glass insurance, liability insurance for
property, building, and business unit as well as for oil tanks and
other technical equipment (e.g. elevators, air conditioners).
- Street cleaning, snow and ice removal as well as care and cleaning of
all outside facilities such as yards, playgrounds, sidewalks, parking
places, driveways, etc., including the devices and materials necessary
for this as well as the replacement of plants and trees.
- Cleaning of property, building, and business unit including the
community areas and rooms, outside glass and facade areas as well as
insect prevention including devices and materials necessary for this.
- Operation and lighting of the community areas and rooms as well as
community property, operation and maintenance
<PAGE>
- 7 -
of the elevators, escalators, revolving doors, electric doors, and
other technical equipment including measuring equipment (in addition
to setting them up); operation and maintenance of a community antenna
as well as a connection to the broad-band cable network including any
private distribution equipment necessary for this; operation and
maintenance of sprinkler equipment and smoke removers as well as other
community equipment.
- Building administration with a flat fee in the amount of 4% of the
basic rent.
- Building administrator, building technician, as well as any security
and any decorations and plant decor for the community areas.
2. The billing of operational costs shall take place according to the
relationship of the rental areas. The landlord can change the invoicing
key after an inexpensive measuring if an appropriate cost distribution or
urgent reasons of official management demand it.
The landlord can put neighboring buildings and/or properties together into
one management and invoicing unit as well as separate buildings and/or
properties that had previously been single invoicing units.
The landlord can form invoicing groups according to type and use (office
areas, store areas, garages) within a building or several buildings.
3. If public expenditures must be reintroduced or if operational costs recur,
the landlord is authorized to invoice these to the tenant as well. This
applies correspondingly to operational costs that have been invoiced
retroactively to the tenant.
4. If, in the course of using the rental rooms, raised operational costs
emerge due to the tenant, e.g. through raised power or water consumption,
etc., the tenant must also bear these costs.
5. Operational costs for equipment that is specially present in only one
rental object must be borne exclusively by the tenant.
6. Commercially dependent waste must be disposed of by the tenant at his or
her own expense.
(S) 7 Heating, hot water, and climate-control equipment
- Operation and costs -
1. Heating and hot water provision equipment as well as climate control
equipment will be put into operation when needed. For disruptions, acts of
God, official orders, or for any other reason that service cannot be
provided (e.g. shortage of fuel,
<PAGE>
- 8 -
nondelivery of heating equipment, or strike), the landlord is not
obligated to provide a replacement. The landlord is liable for damages
only in those instances arising from intent or gross negligence.
In the case of independent, commercial provision of heat (heat supply)
and hot water (hot water supply), these must take place subject to the
conditions of the heat supplier. The tenant will have no ongoing claims
for damage reimbursement from the landlord and the heat supplier as the
landlord may have with respect to the heat supplier.
2. The tenant is obligated to cover costs in a proportionate share for the
operation of facilities including fumes equipment, independently of to what
extent he or she has used the facilities. Under this are included
especially:
- the costs of consumed fuels and their delivery;
- the costs of heat supply;
- the costs of operations-related electricity;
- the costs for service, security, and maintenance of the equipment, of
the regular testing of their operation-readiness and operational
security, including the hiring of an expert and the cleaning of the
equipment and the operational room;
- the costs of measurement under the Federal [illegible] Protection Act;
- the costs of reinforcement or other [illegible] of the sublet of
equipment for consumption records as well as
- the costs of using equipment for consumption records including the costs
of invoicing and distribution.
3. Heating costs will be distributed in accordance with (S) 7 of the Ordinance
on Heating Cost Calculation, in accordance with the recorded heating
consumption and also in accordance with the relationship of the rented-out
areas. The landlord can change the schedule for splitting costs under
inexpensive measurement if an appropriate cost distribution or urgent
reasons for official management require it. The landlord can contract a
specialized company for invoicing.
If, in the rental rooms, measurement-related equipment was installed for
consumption records, the tenant must guarantee access to this measurement
equipment during the standard day hours and make the equipment freely
accessible. If the reading of measures is not possible for the announced
deadline for a reason due to a certain circumstance which the tenant has
represented, the
<PAGE>
- 9 -
tenant has to bear any additional costs arising from this.
4. the rules in No. 3 apply correspondingly as explained under (S) 8 of the
Ordinance on Heating Cost Calculation for the costs of operation of the
hot-water provision equipment and/or for the costs of the hot-water
supply.
5. The distribution of costs for providing heat and hot water for facilities
subject to this contract will take place as described under (S) 9 of the
Ordinance on Heating Costs Calculation.
6. For the distribution of the costs of operation of climate control
equipment, (S) 6 Nos. 2 and 4 will apply, respectively.
(S) 8 Rental Security deposit
1. The rental security deposit agreed to will serve as security of all
requirements stemming from this rental agreement relationship.
2. If the rental security deposit is provided in the form of a guarantee,
then this must be carried out through saving an unlimited self-debiting
guarantee at a German bank with respect to the persuasiveness of the
appeal, charge, advance accusation ((S)(S) 770, 771 Federal Law Register)
and the right from (S) 776 Federal Law Registry.
3. The rental security deposit must be supplied at the start of the rental
period. The tenant will have no claim to transfer the rooms up to the time
that the rental security deposit is furnished.
4. The landlord is authorized, not obligated however, to deduct from the
rental security deposit if the tenant is late in fulfilling his or her
obligations.
(S) 9 Maintenance and use of the building as well as the rental rooms
1. The landlord will take over the maintenance of the buildings in this
building (outside maintenance) and will bear any costs here that may
arise.
2. The tenant will take over the maintenance and upkeep of the community
property and the community technical equipment and facilities as well as
parking places.
3. The tenant must carry out the upkeep, maintenance and attention of the
technical equipment that has been left to his or her exclusive use or that
have been brought in by him or her, at his or her own expense. In
addition, climate control facilities, elevators, escalators within the
rental area, sanitary equipment, electric equipment, reinforcements, sun-
protective equipment (inside and outside), thermostats, heat measurers,
antenna equipment in particular, are a part of this. The landlord is
authorized
<PAGE>
- 10 -
to require proof that such work has been carried out. The landlord
retains the right to subcontract out the work for the tenant.
Damaged or destroyed glass sheets are to be replaced by the tenant at his
or her own expense immediately.
4. The tenant will bear the costs for beautification-related repairs. He or
she must carry out required beautification-related repairs without
special request by the landlord. These repairs include, in particular,
all painting and tapestry works within the rental rooms as well as the
professional upkeep of the floors and floor coverings.
The tenant does not have the right to deviate from the rules above
without the consent of the landlord.
5. The tenant is obligated to clean the rental rooms professionally
including industry-specific equipment. This refers, in addition, to fat
cutters, filters, windows inside and out including the frames with the
required [illegible] care, sun protection equipment, if necessary. If the
cleaning can be performed only by the landlord due to construction-
related or other reasons, then the tenant must endure and bear the costs
of the work.
(S) 10 Construction-related measures by the landlord
1. The landlord can, without the approval of the tenant, have work and
construction-related measures performed for the improvement of the rental
rooms or other parts of the building for the purposes of saving
electricity and heat-related energy, for applying threatening procedures
or for correcting damage. The tenant must keep the rooms coming into
consideration here accessible and may not hinder the execution of work or
delay it. The tenant is not authorized to terminate the contract under
(S) 541b paragraph 2 sentence 2 of the Federal Law Registry.
2. Insofar as the tenant must tolerate the measures, he or she can not
demand reimbursement for his or her expenses. Reimbursement for damages
can be demanded by the tenant only if the use of the rental rooms has
been substantially impinged upon or made impossible by the measures.
(S) 11 Liability of the tenant
1. If, for the duration of the rental relationship in or at the rental
rooms, any deficiency exhibits itself for whose correction the tenant is
not obligated or if precautions for the protection of the rental rooms
against an unpredictable danger become necessary, then the tenant must
inform the landlord of this immediately. If the tenant fails to provide a
punctual notification, then he or she is obligated to cover costs for
damage stemming from this and--insofar as the landlord was hindered from
having the search for a remedy--is not authorized
<PAGE>
- 11 -
to make rent reduction claims valid and to announce this in accordance
with (S) 542 paragraph 1 sentence 3 of the Federal Law Registry to demand
reimbursement for damages due to nonfulfillment.
2. The tenant is liable for all damages that are negligently caused by him
or her, his or her fulfillment assistants, or third parties, insofar as
these have come to his attention for being carried out with respect to
the rental object.
It is incumbent on the tenant to prove that neither he, she nor one of
the aforementioned persons caused any damages.
(S) 12 Termination
1. Termination of the contract must be carried out in writing up to the
third business day of the first month of the termination deadline. In
determining punctuality of termination, this does not depend on the
sending but rather on the receipt of the termination notice.
2. The landlord is authorized, regardless of other legal rules, to terminate
the rental relationship without notice if the tenant
- is late for two successive deadlines submitting the monthly total
payment or a substantial part of the total monthly payment, or
- has gone into arrears in the amount of a balance in a time period
that extends over more than two deadlines with the submission of
the total monthly payment--arrears that meet the total monthly
payment for two months, or
- violates obligations under this contract in a culpable fashion and
does not fulfill them within two weeks after receipt of a written
reminder.
(S) 13 End of the rental period
1. The landlord is authorized to hang rental notices in the area of the
rental rooms before the expiration of the rental period.
2. The tenant must correct installations and building-related changes that
were undertaken before or after moving in before the end of the rental
period; and must reestablish the original or predicated state. The
landlord is authorized, however, to accept installations or building-
related changes wholly or partly. The obligation to execute
beautification repairs in accordance with (S) 9 will remain untouched by
this.
3. The rental rooms are to be returned to the landlord at the end of the
rental period carefully cleaned, maintained, and in renovated state
<PAGE>
- 12 -
after performing the work named in No. 2, with all peripheral items and all
keys.
The landlord may demand a settlement in money for fulfilling this
obligation.
The amount of fulfillment in cash will be provided using one of the offers
to be drawn up by a specialized firm. Both parties to this contract are
authorized to present a corresponding offer. If no agreement can be
reached, the offer of one of the specialized firms to be named by the local
trade corporation will be binding for both parties to this contract.
4. If rental rooms cannot be returned at the end of the rental period, the
tenant is obligated to pay a use reimbursement fee in the amount of the
previous and/or of the target rent. If the tenant continues use of the
rental rooms beyond the termination of the contract, then the rental
relationship will not apply as automatically extended. (S) 568 of the
Federal Law Registry will find no application here. Furthermore, the tenant
must reimburse each instance of damage that the landlord incurs in not
having the rental rooms returned to him or her punctually.
The same will apply if the rental rooms are in a state consistent with
the contract. The date on which the contractual state was produced will
be assumed as the point in time of return.
5. If the tenant returns or vacates the rental rooms before the end of the
rental period, the landlord will be--regardless of the still-existing
payment obligation of the tenant--authorized to undertake renovation and
maintenance work as well as other construction-related measures within
the rental rooms. The landlord may decorate restaurants or shop
locations.
6. If the rental relationship ends via termination without notice by the
landlord, then the tenant is liable for all damages stemming from the
termination, in particular any rent due. The liability will exist at its
greatest up to the point in time at which the rental relationship could
have been terminated within the context of an official termination.
(S) 14 Entering the rental rooms on the part of the landlord
The landlord, or his or her representative, may enter the rental rooms at
appropriate times of day to check on the state, to take readings of measurement
devices, to rent out the property again, or for any similar reasons--they may
also be accompanied by third parties. The tenant must take care that the rental
rooms are in condition to be entered even in his or her absence.
<PAGE>
- 13 -
(S) 15 Majority of tenants
1. With a majority of tenants, each tenant is liable for the obligation
under the rental agreement as a sole debtor.
2. Business related legal declarations that affect the rental relationship
must be submitted by or to all tenants. While retaining the right to
cancel in writing, the tenants, also however, authorize each other, until
further notice, to accept or issue such declarations. This authorization
also applies to the acceptance of a termination, but not however to the
submission of a declaration of termination and the conclusion of a rent
cancellation contract. A cancellation of the authorization enters into
force only for declarations that were submitted after the receipt by the
landlord.
3. If the landlord must provide payments to the tenants, he or she can pay
one of them on behalf of all of them.
(S) 16 Handling dangerous materials
Insofar as, and to whatever extent, the tenant may handle materials in the
rental object that tend to endanger health or the environment (e.g. materials
that are poisonous, damaging to ones health, flammable, infectious, explosive,
irritating, nauseating, carcinogenic, potentially water polluting), the tenant
is obligated to adhere without limitation and independently to all decisive
security regulations for the handling of these dangerous materials and to hold
the landlord harmless of all risks connected with these dangerous materials,
even after the expiration of the rental relationship.
(S) 17 Protection of personal data
The data necessary to carry out this rental agreement will be saved through data
processing at the landlord's place of business and will be transmitted, to the
extent necessary, within the context of the purpose of this contractual
relationship.
(S) 18 Applicability in the case of partial invalidity
If a term of this rental agreement is inapplicable or ceases to be an integral
component to this rental agreement, the rest of the contract shall remain in
force. In this case, the parties to this contract will agree to a new rule that
comes closest to the original intent of the parties.
<PAGE>
- 14 -
(S) 19 Court of jurisdiction
The court of jurisdiction is Wiesbaden insofar as this has been agreed to as
permissible.
(S) 20 Final terms
Oral side agreements will not apply.
Alterations and supplements to the rental contract must be performed in writing.
<PAGE>
Building ordinance for the rental agreement
The building ordinance serves to protect the house and insure its security and
that of its users. Please adhere to these rules so that an orderly and
disruption-free coexistence is possible for all parties involved.
(S) 1 Mutual consideration
The common use of a building by tenants with different corporate structures and
in different branches of industry requires mutual consideration beyond a good
neighborly relationship.
Sound and smell disruptions must be avoided in the interest of all tenants. For
this reason, all devices, machines, etc. whose operation causes noise must be
set up to reduce noise such that no transmission of noises into another rental
object can take place.
(S) 2 Storage of objects, fire protection
Stairwells and all other hallways, basement corridors, etc. that are provided
for common use have been designated as escape paths for the security of all
tenants in the case of fire. These areas may under no circumstances--not even
temporarily--be used to store furniture, packaging items, wares and similar
things.
The storage of old paper and other easily flammable objects in the basement or
in the attic is not permitted.
Motorized vehicles may be parked only in those places identified for them.
(S) 3 Climate control, heating and sun protection equipment
In air-conditioned and heated rooms one must be careful that air circulation is
not impinged upon by inappropriate furnishing (e.g. by storing objects on top of
the air conditioner's vent openings or by placing office furniture too close to
climate control equipment). The windows of air-conditioned and heated rooms
must be kept closed at all times.
Hand-operated sun protection equipment should be set up immediately whenever
there is wind or rain.
(S) 4 Elevators
Tenants who want to transport furniture or other heavy items can--insofar as no
special service elevator exists--make use of the elevator for persons with the
approval of the building administrator. If necessary the elevator cabin must be
lined to protect it from damages.
<PAGE>
(S) 5 Garbage and refuse removal
Refuse may be collected only in suitable closed containers and emptied into
garbage bins. Tenants whose area of business (e.g. restaurant) requires
additional garbage bins, must order these specially.
For special garbage, the normal garbage bins cannot be used.
Insofar as special collection stations are set up for old paper, packaging
materials, glass, etc. these are to be used by all tenants.
A garbage removal facility cannot have restricted refuse (cartons or other
packaging materials, bottles, etc.) with flammable or smoldering material or
liquids sent to it.
The tenants are obligated to sort their garbage according to different types
insofar as this is required by communal ordinances.
(S) 6 Frost protection
In order to avoid frost damages, the rental rooms are to be adequately heated
even outside of usual business hours. Basement windows and ceiling holes are to
be kept closed during the frost period.
(S) 7 Building lockup
It is incumbent upon the tenants of the building to keep access closed from
o'clock in the evening through o'clock in the morning and to confirm any
possible existing security issues. During this time elevators may be put out of
service and stairwell lighting may be limited.
Basement and courtyard doors as well as doors to communal garages are to be kept
closed at all times.
(S) 8 Additional rules
The tenants must adhere to official regulations (in particular to those of
building and fire police as well as to industrial supervisors).
The tenants will take care that the building ordinance is followed by their
employees, sublessors, suppliers, visitors, etc. as well as any tradesmen
employed by them.
The building ordinance and other ordinances drawn up for the operation or the
use of community property can be altered by the landlord. The alterations must
be made known to the tenants.
<PAGE>
OFFICE AND BUSINESS BUILDING OF DBV IN KARLSRUHE, KARLSTRASSE 27
CLEANING ROOM
SOCIAL ROOM STORAGE ROOM
TERRACE ADMINISTRATION MANAGERS TERRACE
OFFICE USE
KARLSRUHE IN JANUARY 1984
SIXTH FLOOR
N-1:100
PROFESSOR RUDOLF KLEINE
FREELANCE ARCHITECT [ILLEGIBLE]
[ILLEGIBLE ADDRESS]
The original version of this Commercial Rental Agreement, dated October 18,
1995, by and between Deutsche - Bemanten - Lebensversicherung AG and Viona
Development Soft - and Hardware Engineering GMbh was in German, I certify that
the foregoing is a fair and accurate English translation of te German version.
_____________________________
Jason Liu
Secretary
<PAGE>
[LOGO OF QI APPEARS HERE] EXHIBIT 10.14
Mr. Francis E.J. Wilde III
316 Ridgehaven Place
Richardson, TX 75080 August 20, 1997
RE: OFFER OF EMPLOYMENT
Dear Frank:
On behalf of Quadrant International, Inc. (QI), I am pleased to offer you
employment as the President of Quadrant International, Inc. In this position you
will have a broad range of responsibilities which we will develop together to
ensure that QI meets its overall corporate objectives. In this capacity, you
will report to Gregg Garnick, CEO and Chairman for QI and you will have an
expected starting date of Monday, August 25, 1997.
QI is confidant that you have the attitude, desire, skills and work ethic to
quickly become an integral part of the company, management team and Board of
Directors. I, along with the entire QI team, are looking forward to you joining
us in our pursuit of building a profitable, world-wide and fast growth company.
1) CASH COMPENSATION - in terms of cash compensation, we have agreed that it
-----------------
shall be comprised of the following elements:
a) Initial Base pay of $130,000 per annum. As agreed, annual base pay
will be adjusted upward upon QI securing a minimum of $2m in additional
equity financing. Annual base pay will be set at a minimum level of 10%
lower than annual base pay of that of QI's CEO. For planning purposes it
should be noted that wages at QI are paid once a month on the last day of
each month.
b) Signing Bonus of $25,000. To facilitate your transition from Texas to
Pennsylvania and ensure a smooth move, QI agrees to pay you a one time
signing bonus in the amount of $25,000 payable in three monthly
installments: $10,000 upon execution of this agreement, $10,000 payable
thirty days following your first day at QI and the remaining $5,000 payable
thirty days later.
c) You will receive a monthly car allowance of $600.
2) INCENTIVE STOCK OPTION - QI agrees to grant to you a incentive stock option
----------------------
for up to 1,OOO,OOO shares of QI common stock subject to the satisfaction of the
performance goals set forth below. These shares will be granted upon your start
date at an exercise price of $1.00 per share under QI's ESOP plan. The 1,000,000
shares will vest in equal increments of 200,000 shares per quarter and based on
meeting pre-established quarterly goals set between you, me and QI's BOD.
Upon the successful sale of QI at a minimum valuation of $80M the 1,000,000
shares stated above will automatically vest
<PAGE>
3) INCENTIVE CASH BONUS - Upon the successful sale of QI at a minimum valuation
--------------------
of $80M, QI agrees to issue to you a total of 2.5% of the proceeds or $2,000,000
in cash. Payment will be made thirty days following the receipt of proceeds from
the sale.
4) HEALTH INSURANCE - QI will pay 100% of your health insurance. To facilitate
----------------
your need for immediate health insurance coverage, QI agrees to reimburse you
directly for COBRA coverage.
5) EXPENSES - Monthly expenses: telephone, entertainment (to be budgeted) and
--------
travel to be budgeted (airfare, rental cars, food and lodging) will be fully
reimbursed upon receipt of monthly expense reports. Such reports must be
completed in accordance with standard company operating procedure.
6) CONFIDENTIALITY AND NON COMPETE - As with all Senior QI employees, you will
-------------------------------
be requested to sign a Confidentiality and Non-Compete Agreement. A copy of
these documents will follow via courier within the next few days. Upon your
receipt please review and execute these documents at your earliest convenience.
Should you have any questions on this Offer or Confidentiality and Non-Compete
Agreement, do not hesitate to contact me. Otherwise, I would ask you to kindly
indicate your acceptance of these terms by signing one copy in the space
provided below and returning same to my attention.
I look forward to speaking with you throughout the week.
Warm Regards,
Quadrant International Inc.
Gregg Garnick
CEO and Chairman
ACCEPTED AND AGREED TO:
/s/ Francis E.J. Wilde 8/25/97
- ------------------------- -------------
Francis E.J. Wilde III DATE
[enclosure to follow with hard copy)
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 12th day of
November 1997, and is by and between Quadrant International, Inc., a
Pennsylvania corporation with an office for purposes of this Agreement at 269
Great Valley Parkway, Malvern, Pennsylvania 19355 (hereinafter "QI") and Mike
Harris with an address at 115 Charlestown Hunt Drive, Phoenixville,
Pennsylvania, 19460 (hereinafter the "MH").
WITNESSETH
WHEREAS:
(a) QI wishes to retain the services of MH to render services for and on
its behalf in accordance with the following terms, conditions and provisions;
and
(b) MH wishes to perform such services for and on behalf of the Company,
in accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT. QI hereby employs MH and MH accepts such employment and
shall perform his duties and the responsibilities provided for herein in
accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. MH shall at all times be QI's employee subject to
the terms and conditions of this Agreement.
3. TITLE AND DUTIES. QI agrees to employ MH and MH accepts such
employment as a full time employee and agrees as per the terms and conditions of
this agreement to serve as and have the title of Chief Technology Officer of QI
with the authority and responsibilities normally associated with that position,
it being agreed MH will report directly to QI's President and will be subject to
the President's direction and will perform diligently, faithfully, and to the
best of his ability all duties assigned and instructions given consistent with
his title as Chief Technology Officer. MH, during the term of his employment,
will also serve as a member of QI's Board of Directors.
4. TERM OF SERVICES. The initial term of this agreement is for a two year
period commencing January 1, 1998, subject to the termination section of this
agreement, with the parties agreeing to confirm any subsequent extension of this
initial term either in one year extensions or in any other format in a signed
written agreement setting forth any amended or supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services for
the initial term of this agreement shall be $125,000 as an annual amount payable
in accordance with QI's payroll procedures and policies as implemented during
the term of this agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation proposed
by this section is subject to QI's receipt of further capital funds required to
finance the
1
<PAGE>
management compensation program. QI's Board of Directors will also have to vote
approval of these or any other specific additional compensation packages
proposed for payment or for vesting to MH during the term of this agreement. The
proposed post funding compensation program allocated for MH will be comprised of
the following elements:
(a) An annual Cash Bonus of $35,000
(b) Further incentive stock options exercisable by MH as specified and
approved by the Board of Directors for exceptional performance as defined and
determined by the Board of Directors for purchase by MH in the amount of 25,000
shares of QI stock on a non-diluted basis in minimum blocks of 12,500 at a price
of .25.
7. EXTENT OF SERVICES. MH shall devote his entire business time,
attention, and energies to the business of QI, but this shall not be construed
as preventing MH from investing his assets as a passive investor in such form or
manner as he sees fit as long as the investments will not require any personal
services from MH. However, MH agrees not to knowingly invest in any entities
that compete directly with QI or affiliated or related companies. MH shall have
the further right to serve on other Boards of Directors provided it is
determined by the President of QI that there is no conflict of interest with
such service and MH duties pursuant to the employment agreement and such other
Board services does not interfere with the performance of the stated services
for QI.
8. TERMINATION. A. In the event QI terminates MH's employment for any
reason other than MH's gross malfeasance or gross nonfeasance, MH will continue
to be paid his salary by QI for a period of six months after such notice of
termination is given. It is agreed that if QI terminates MH's employment
pursuant to this paragraph, that all outstanding stock options held by MH at the
date of termination will immediately be deemed fully vested as of that date, and
be exercisable in accordance with their terms.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of MH.
C. For purposes of this specific employment agreement the parties agree
that any one of the following items shall be deemed to be, at the sole option of
MH, an event of termination without cause:
2
<PAGE>
1) Either QI moves its current headquarters more than 25 miles from
Malvern, Pennsylvania or
2) MH is transferred to a location based more than 25 miles from
Malvern, Pennsylvania or
3) MH position and responsibility as QI's Chief Technology Officer
is arbitrarily so substantially changed or modified during this agreement and MH
upon 30 days written notice to the President or CEO setting forth the basis for
MH's objection to the changes is not satisfied at the end of the 30 day period
with the solution proposed to resolve the issue.
4) The business relationship between QI and Viona Development Hard
and Software Engineering, GMBH (Viona) a non party to this employment agreement
is terminated by either QI or Viona or by mutual agreement.
5) MH is required to travel more than two weeks per 30 days although
the parties acknowledge that all travel must be in accord with QI's budgetary
limits and the two weeks while considered to be a maximum can be waived as per
the decision of MH.
6) Change in control to be described by 2/28/98.
D. It is understood and agreed that this is a personal services contract,
and that QI shall have the right to terminate this agreement on 10 days notice
to MH, if appropriate, in the event of the disability or death of MH which would
otherwise prevent him from performing his or her duties. For the purposes of the
definition of "disability" it shall be deemed to have the identical definition
as contained in QI's disability insurance policy. In the event of MH's death,
any guaranteed monies or benefits due under this agreement would be paid
directly to QI's estate as probated.
9. NONDISCLOSURE. During the course of his employment with QI, MH will
have occasion to conceive, create, develop, review, or receive information that
is considered by QI to be confidential or proprietary including information
relating to inventions, patent, trademark and copyright applications,
improvements, know-how, specifications, drawings, cost and pricing date, process
flow diagrams, customer and supplier lists, bills, ideas, and/or any other
written material referring to same (Confidential Information). Both during the
term or employment and thereafter:
1. MH, as the Chief Technology Officer and as an employee,
agrees to maintain in strict confidence such Confidential Information.
2. MH further agrees to use his best efforts to ensure that all such
Confidential Information is properly protected and kept from unauthorized
persons or disclosure.
3. If requested by QI, MH agrees to promptly return to QI all
materials,
3
<PAGE>
writings, equipment, models, mechanisms, and the like obtained from or
through QI, including but no limited to, all Confidential Information, all
of which MH recognizes is the sole and exclusive property of QI.
4. MH agrees that he will not, without first obtaining the prior
written permission of QI: (a) directly or indirectly utilize such Confidential
Information in his or her own business; (b) manufacture and/or sell any product
that is based in whole or in part on such Confidential Information; or (c)
disclose such Confidential Information to any third party.
10. INVENTIONS. Any items created for QI by MH or under the supervision of
MH as the Chief Technology Officer and as an employee of QI, during this
agreement shall be and remain the sole and exclusive property of QI, such items
to include so called computer hardware and software applications and programs
and materials relating thereto and MH specifically waives any and all claims
thereto.
11. EMPLOYER PREQUISITES. MH shall be entitled to and shall receive all
employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a. Health insurance under terms and conditions as provided to other
employees of QI.
b. Vacation of 20 business days per annum.
c. Paid holidays pursuant to QI's stated policy.
12. REPRESENTATIONS AND WARRANTIES. A. MH represents and warrants to QI
that he is not a party to or otherwise bound by any other employment or services
that may, in any way, restrict his right or ability enter into this agreement or
otherwise be employed by QI.
B. MH agrees that he will not reveal to QI, or otherwise utilize in his
employment with QI, any proprietary trade secrets or confidential information or
any previous employer.
13. NOTICES. Any written notice required to be given pursuant to this
agreement shall be hand delivered, or delivered by a national overnight express
service such as Federal Express.
14. JURISDICTION AND DISPUTES. A. This agreement shall be governed by the
State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state or
federal courts of Pennsylvania. The parties consent to the jurisdiction of such
courts, agree to accept service of process by mail, and waive any jurisdictional
or venue defenses otherwise available. The parties reserve the right to mutually
agree to binding arbitration in accordance with the policies of the American
Arbitration Association.
15. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
and shall insure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
4
<PAGE>
16. WAIVER. No waiver by either party of any default shall be deemed as a
waiver of any prior or subsequent default of the same or other provisions of
this agreement.
17. SEVERABILITY. If any provision hereof is held invalid or unenforceable
by a court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision, and such invalid provision shall
be deemed to be served from the agreement.
18. ASSIGNABILITY. This agreement and the rights and obligations
thereunder are personal with respect to MH and may not be assigned by any action
of MH or by operation of law. QI shall, however, have the right to assign this
agreement to a successor in interest to QI or to the purchaser of any of the
assets of QI but not to any other third party.
19. INTEGRATION. This agreement constitutes the entire understanding of
the parties, and revokes and supersedes all prior agreements between the parties
and is intended as a final expression of their agreement. It shall not be
modified or amended except in writing signed by the parties hereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and MH confirm the foregoing accurately sets forth
the parties respective rights and obligations and agrees to be bound by having
the evidenced signature affixed thereto.
Quadrant International, Inc. Michael R. Harris
By: /s/ Francis Wilde Signature: /s/ Michael R. Harris
Francis Wilde, President
Date: 1/12/98 Date: 1/12/98
[Handwritten note]
Mike will have his attorney complete the changes made in this copy as well as
complete a further definition of change in control and this agreement will
govern until the revised document is completed.
Francis Wilde
1/12/98
5
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 12th day of
November, 1997, and is by and between Quadrant International, Inc., a
Pennsylvania corporation with an office for purposes of this Agreement at 269
Great Valley Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and
Jason Liu with an address at 508 Gordon Avenue, Narbeth, Pennsylvania 19072
(hereinafter "LIU").
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of LIU to render services for
and on its behalf in accordance with the following terms, conditions and
provisions; and
(b) LIU wishes to perform such services for and on behalf of QI, in
accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT. QI hereby employs LIU and LIU accepts such employment and
----------
shall perform his duties and the responsibilities provided for herein in
accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. LIU shall at all times be QI's employee subject to
-----------------
the terms and conditions of this Agreement.
<PAGE>
3. TITLE AND DUTIES. QI agrees to employ LIU and LIU accepts such
----------------
employment as a full-time employee and agrees as per the terms and conditions of
this Agreement to serve as and have the title of Chief Financial Officer of QI
with the authority and responsibilities normally associated with that position,
it being agreed LIU will report directly to QI's President and will be subject
to the President's direction and will perform diligently, faithfully, and to the
best of his ability all duties assigned and instructions given.
4. TERM OF SERVICES. The initial term of this Agreement is for a two
----------------
year period commencing January 1, 1998, subject to the termination section of
this agreement, with the parties agreeing to confirm any subsequent extension of
this initial term either in a one year extension or in any other format in a
signed written agreement setting forth any amended or supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services for
-----------------
the initial term of this agreement shall be $125,000 an annual amount payable in
accordance with QI's payroll procedures and policies as implemented during the
term of this Agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation proposed
-----------------------
by this section is subject to QI's receipt of further capital funds required to
finance the management compensation program. QI's Board of Directors will also
have to vote approval of these or any other specific additional compensation
packages proposed for payment or for vesting to LIU during the term of this
agreement. The proposed post funding
-2-
<PAGE>
compensation program allocated for LIU will be comprised of the following
elements:
a) An annual Cash Bonus of $35,000
b) Further incentive stock options as specified and approved
by the Board of Directors by means of stock options at the rate of 25,000
shares per year for significant performance with an additional stock option
at the rate of 12,500 shares per year for exceptional performance as
defined and determined by the Board of Directors.
7. EXTENT OF SERVICES. - LIU shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing LIU from investing his assets as a passive investor in such form
or manner as he sees fit as long as the investments will not require any
personal service from LIU. However, LIU agrees not to knowingly invest in any
entities that compete directly with QI or affiliated or related companies.
8. TERMINATION. A. In the event QI terminates LIU's employment for any
-----------
reason other than LIU's gross malfeasance or gross nonfeasance, LIU will
continue to be paid his salary by QI for a period of six months after such
notice of termination is given or until LIU shall commence employment of a
comparable nature and salary with another entity, whichever shall first occur.
In this regard, it is understood and agreed that LIU shall use his best efforts
in attempting to locate such other employment and QI agrees to cooperate in
helping LIU in the pursuit of any such position and QI agrees to provide the
requisite references and if such employment is of a lesser salary than his then
current salary at QI, QI agrees to reimburse LIU for the difference between such
-3-
<PAGE>
salaries for the six month period specified above. It is agreed that any stock
options awarded LIU will continue to vest and be exercisable during this six
month period.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of LIU.
C. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 10
days notice to LIU, if appropriate, in the event of the disability or death of
LIU which would otherwise prevent him from performing his or her duties. For
purposes of this provision, "disability" shall be defined in accordance with the
definition of "disability" as contained in QI's disability insurance policy. In
the event of LIU's death, any guaranteed monies due under this agreement would
be paid directly to QI's estate as probated.
D. If the company decides to move outside a 25 mile radius of the
current company location then LIU has the option to exercise the provisions
under Paragraph 8, Section A.
9. NONDISCLOSURE. During the course of his employment with QI, LIU may
-------------
have occasion to conceive, create, develop, review, or receive information that
is considered by QI to be confidential or proprietary, including information
relating to inventions, patent, trademark and copyright applications,
improvements, know-how, specifications, drawings, cost and pricing date, process
flow diagrams, customer and supplier lists, bills, ideas, and/or any
-4-
<PAGE>
other written material referring to same (Confidential Information). Both during
the term of employment and thereafter:
1. LIU, as an officer and employee, agrees to maintain in
strict confidence such Confidential Information.
2. LIU further agrees to use his best efforts to ensure that
all such Confidential Information is properly protected and kept from
unauthorized persons or disclosure.
3. If requested by QI, LIU agrees to promptly return to QI all
materials, writings, equipment, models, mechanisms, and the like
obtained from or through QI, including but not limited to, all
Confidential Information, all of which LIU recognizes is the sole and
exclusive property of QI.
4. LIU agrees that he will not, without first obtaining the
prior written permission of QI: (a) directly or indirectly utilize
such Confidential Information in his or her own business; (b)
manufacture and/or sell any product that is based in whole or in part
on such Confidential Information; or (c) disclose such Confidential
Information to any third party.
10. EMPLOYER PERQUISITES. LIU shall be entitled to and shall receive all
--------------------
employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a. Health insurance under terms and conditions as provided to
other employees of QI.
b. Vacation of 10 business days per annum.
c. Paid holidays pursuant to QI's stated policy.
11. REPRESENTATIONS AND WARRANTIES. A. LIU represents and warrants to
------------------------------
Company that he is not a party to or otherwise bound by any other employment or
services that may, in any way, restrict his right or ability to enter into this
agreement or otherwise be employed by QI.
-5-
<PAGE>
B. LIU agrees that he will not reveal to QI, or otherwise utilize in
his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by the
-------------------------
State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state
or federal courts of Pennsylvania. The parties consent to the jurisdiction of
such courts, agree to accept service of process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
-------------------------------
and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed as a
------
waiver of any prior or subsequent default of the same or other provisions of
this agreement.
16. SEVERABILITY. If any provision hereof is held invalid or unenforceable
------------
by a court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision, and such invalid provision shall
be deemed to be severed from the agreement.
-6-
<PAGE>
17. ASSIGNABILITY This agreement and the rights and obligations thereunder
-------------
are personal with respect to LIU and may not be assigned by any action of LIU or
by operation of law. QI shall, however, have the right to assign this agreement
to a successor in interest to QI or to the purchaser of any of the assets of QI
but not to any other third party.
18. INTEGRATION. This agreement constitutes the entire understanding of
-----------
the parties, and revokes and supersedes all prior agreements between the parties
and is intended as a final expression of their agreement. It shall not be
modified or amended except in writing signed by the parties hereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and LIU confirm the foregoing accurately sets
forth the parties respective rights and obligations and agrees to be bound by
having the evidenced signature affixed thereto.
Quadrant International, Inc. Jason Liu
By: /s/ Francis Wilde /s/ Jason Liu
--------------------- ---------------------
Francis Wilde, President Signature
Date: 12/16/97 Date: 12/16/97
------------------- ----------------
-7-
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 11th day of
December, 1997, and is by and between Quadrant International, Inc., a
Pennsylvania corporation with an office for purposes of this Agreement at 269
Great Valley Parkway, Malvern, Pennsylvania 19355 (hereinafter "QI") and Leonard
Sharp with an address at 900 Burnett Ave. Morgan Hill, California hereinafter
"Sharp".
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of Sharp to render services for
and on its behalf in accordance with the following terms, conditions and
provisions; and
(b) Sharp wishes to perform such services for and on behalf of QI, in
accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT. QI hereby employs Sharp and Sharp accepts such employment
----------
and shall perform his duties and the responsibilities provided for herein in
accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. Sharp shall at all times be QI's employee subject
-----------------
to the terms and conditions of this Agreement.
<PAGE>
3. TITLE AND DUTIES. QI agrees to employ Sharp and Sharp accepts such
----------------
employment as a full time employee and agrees as per the terms and conditions of
this agreement to serve as and have the title of Vice President of Sales and
Marketing of QI with the authority and responsibilities normally associated with
that position, it being agreed Sharp will report directly to QI's President and
will be subject to the President's direction and will perform diligently,
faithfully, and to the best of his ability all duties assigned and instructions
given.
4. TERM OF SERVICES. The initial term of this agreement is for a two year
----------------
period commencing January 1, 1998, subject to the termination section of this
agreement, with the parties agreeing to confirm any subsequent extension of this
initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. Sharp's base salary for rendered services for
-----------------
the initial term of this agreement shall be $125,000 an annual amount payable in
accordance with QI's payroll procedures and policies as implemented during the
term of this Agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation proposed
-----------------------
by this section is subject to QI's receipt of further capital funds required to
finance the management compensation program. QI's Board of Directors will also
have to vote approval of these or any other specific additional compensation
packages proposed for payment or for vesting to Sharp during the term of this
agreement. The proposed post funding
-2-
<PAGE>
compensation program allocated for Sharp will be comprised of the following
elements:
a) An annual Cash Bonus of $35,000
b) Commission: For 1998, an amount equal to 3% of the gross contribution
margin in excess of $9,236,000 the "plan"). The plan numbers will be
broken into quarterly amounts with the commission paid quarterly based
on those objectives. For 1999, a commensurate commission plan will be
developed based on 1999 objectives.
c) Stock Options:
i) Initial option: QI shall grant Sharp an option (the "Initial
Option") to purchase common stock of QI, which is intended to be
an incentive stock option within the meaning of Section 422 of
the Internal Revenue Code of 1986 as amended. The Initial Option
shall entitle Sharp to purchase 500,000 shares of QI's Common
Stock which equals approximately 1.61 percent (1.61%) of QI's
outstanding capitalization on an as converted and fully diluted
basis as of the date of this agreement. Of this 500,000 shares,
350,000 shares will be granted effective the date of hire,
150,000 shares will be granted effective 180 days after date of
hire. The per share exercise price for the Initial Option shall
be equal to $1.00, the fair market value of QI's common stock per
share at the time of grant, provided however, that in the event
the Board subsequently determines the fair market value of QI's
Common Stock to be less than $1.00 and offers to each person who
holds an option to purchase Common Stock of QI the ability to
elect to amend their respective stock option agreements to reduce
the exercise price set forth therein accordingly, Sharp shall be
eligible to make such an election with respect to the Initial
Option. The initial option shall vest and become exercisable
according to QI' s current incentive stock option program. Vested
options must be exercised within 5 years of date of grant.
(ii) Change of Control provision: Where Change of Control is defined
as (a) the direct or indirect sale or exchange by the
shareholders of QI of all or substantially all of the capital
stock of QI,(b) a merger or consolidation of QI with any other
corporation which results in the voting securities
-3-
<PAGE>
of QI outstanding immediately prior thereto representing less
than 50% of the total voting power represented by the voting
securities of QI or such surviving entity outstanding immediately
after such merger or consolidation, or (c) the approval by the
shareholders of QI of a plan of compete liquidation. (d) the
resignation, termination, or demotion in position, title,
organizational level, or responsibilities, whether voluntary or
involuntary, of Frank Wilde as President of QI. Upon a change of
Control, the entire unvested portion of all stock options
(together "Unvested Options") held by Sharp under QI's stock
option plans shall automatically vest and Sharp shall have the
right to exercise all or any portion of such stock options so
vested in addition to any portion of the option vested prior to
such vesting. If the change of control occurs before the balance
of 150,000 shares of the Initial Option are granted, then those
shares shall be immediately granted and shall automatically vest,
along with the other 350,000 shares.
d) After the first year of Sharp's employment, further incentive stock
options will be granted as specified and approved by the Board of
Directors by means of stock options at the rate of 25,000 shares per
year for significant performance with an additional stock option at
the rate of 12,500 shares per year for exceptional performance as
defined and determined by the Board of Directors.
e) Car Allowance: $500 per month
f) Business Expenses: In addition to funding the business expenses
associated with the remote office in San Jose, and normal
reimbursement of business expenses per QI's stated policy, QI will
reimburse Sharp for personal office expenses in Morgan Hill through
the termination of Sharp's $650 lease in October of 1998. In order to
qualify for this reimbursement, the Morgan Hill office space will be
utilized for QI's business purposes.
g) Signing Bonus: $10,000 plus vesting of the options for 35,000 shares
granted as part the existing consulting contract between QI and Sharp
7. EXTENT OF SERVICES. Sharp shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing Sharp from investing his
-4-
<PAGE>
assets as a passive investor in such form or manner as he sees fit as long as
the investments will not require any personal service from Sharp. However, Sharp
agrees not to invest in any entities that compete directly with QI or affiliated
or related companies.
8. TERMINATION.
-----------
a) In the event QI terminates Sharp's employment for any reason
other than Sharp's gross malfeasance or gross nonfeasance, Sharp
will continue to be paid his salary by QI for a period of six
months after such notice of termination is given or until Sharp
shall commence employment of a comparable nature and salary with
another entity, whichever shall first occur. In this regard, it
is understood and agreed that Sharp shall use his best efforts in
attempting to locate such other employment and QI agrees to
cooperate in helping Sharp in the pursuit of any such position
and QI agrees to provide the requisite references and if such
employment is of a lesser salary than his then current salary at
QI, QI agrees to reimburse Sharp for the difference between such
salaries for the six month period specified above. It is agreed
that any stock options awarded Sharp will continue to vest during
this six month period.
b) QI shall have the absolute right to terminate this agreement
immediately in the event of gross
-5-
<PAGE>
malfeasance or gross nonfeasance on the part of Sharp.
c) It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this
agreement on 10 days notice to Sharp, if appropriate, in the
event of the disability or death of Sharp which would otherwise
prevent him from performing his duties. For purposes of this
provision, "disability" shall be defined in accordance with the
definition of "disability" as contained in QI's disability
insurance policy. In the event of Sharp's death, any guaranteed
monies due under this agreement would be paid directly to Sharp's
estate as probated.
d) If QI requires Sharp to relocate more than 50 miles from the
initial business location for his position in San Jose,
California, Sharp has the option to exercise the provisions under
Paragraph 8, Section a).
9. NONDISCLOSURE. During the course of his employment with QI, Sharp may
-------------
have occasion to conceive, create, develop, review, or receive information that
is considered by QI to be confidential or proprietary, including information
relating to inventions, patent, trademark and copyright applications,
improvements, know-how, specifications, drawings, cost and pricing date, process
flow
-6-
<PAGE>
diagrams, customer and supplier lists, bills, ideas, and/or any other written
material referring to said Confidential or Proprietary information, both during
the term of employment and thereafter.
(a) Sharp, as an employee, agrees to maintain in strict confidence such
Confidential Information.
(b) Sharp further agrees to use his best efforts to ensure that all such
Confidential Information is properly protected and kept from unauthorized
persons or disclosure.
(c) If requested by QI, Sharp agrees to promptly return to QI all
materials, writings, equipment, models, mechanisms, and the like obtained from
or through QI, including but not limited to, all Confidential Information, all
of which Sharp recognizes is the sole and exclusive property of QI.
(d) Sharp agrees that he will not, without first obtaining the prior
written permission of QI: (a) directly or indirectly utilize such Confidential
Information in his or her own business; (b) manufacture and/or sell any product
that is based in whole or in part on such Confidential Information; or (c)
disclose such Confidential Information to any third party.
10. EMPLOYER PERQUISITES. Sharp shall be entitled to and shall receive all
--------------------
employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a. Health insurance under terms and conditions as provided to other
employees of QI.
b. Vacation of 10 business days per annum.
c. Paid holidays pursuant to QI's stated policy.
-7-
<PAGE>
d. 401(K) retirement plan pursuant to QI's stated policy.
e. Sharp will be reimbursed for his current health insurance plan at
the rate of $300/month for the duration of this contract.
11. REPRESENTATIONS AND WARRANTIES. A. Sharp represents and warrants to
------------------------------
Company that he is not a party to or otherwise bound by any other employment or
services that may, in any way, restrict his right or ability to enter into this
agreement or otherwise be employed by QI.
B. Sharp agrees that he will not reveal to QI, or otherwise utilize in
his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by the
-------------------------
State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state or
federal courts of Pennsylvania. The parties consent to the jurisdiction of such
courts, agree to accept service of process by mail, and waive any jurisdictional
or venue defenses otherwise available. The parties reserve the right to mutually
agree to binding arbitration in accordance with the policies of the American
Arbitration Association.
-8-
<PAGE>
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
-------------------------------
and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed as a
------
waiver of any prior or subsequent default of the same or other provisions of
this agreement.
16. SEVERABILITY. If any provision hereof is held invalid or unenforceable
------------
by a court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision, and such invalid provision shall
be deemed to be severed from the agreement.
17. ASSIGNABILITY. This agreement and the rights and obligations
-------------
thereunder are personal with respect to Sharp and may not be assigned by any
action of Sharp or by operation of law. QI shall, however, have the right to
assign this agreement to a successor in interest to QI or to the purchaser of
any of the assets of QI but not to any other third party.
18. INTEGRATION. This agreement constitutes the entire understanding of
-----------
the parties, and revokes and supersedes all prior agreements between the parties
and is intended as a final expression of their agreement. It shall not be
modified or amended except in writing signed by the parties hereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and Sharp confirm the foregoing accurately sets
forth the parties respective rights and obligations
-9-
<PAGE>
and agrees to be bound by having the evidenced signature affixed thereto.
Quadrant International, Inc. Leonard Sharp
By: /s/ Francis Wilde /s/ Leonard Sharp
--------------------------- ----------------------------
Francis Wilde, President Signature
Date: 12-15-97 Date: 12-15-97
------------------------ ----------------------
-10-
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the ____ day of
December, 1997, and is by and between Quadrant International, Inc., a
Pennsylvania corporation with an office for purposes of this agreement at 269
Great Valley Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and
Robert Russell with an address at 612 Cherry Lane, Phoenixville, Pennsylvania
19460 (hereinafter "Russell").
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of Russell to render services for
and on its behalf in accordance with the following terms, conditions and
provisions; and
(b) Russell wishes to perform such services for and on behalf of QI,
in accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT. QI hereby employs Russell and Russell accepts such
----------
employment and shall perform his duties and the responsibilities provided for
herein in accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. Russell shall at all times be QI's employee subject
-----------------
to the terms and conditions of this Agreement.
<PAGE>
3. TITLE AND DUTIES. QI agrees to employ Russell and Russell accepts such
----------------
employment as a full time employee and agrees as per the terms and conditions of
this agreement to serve as and have the title of Director of Engineering and
perform diligently, faithfully, and to the best of his ability all duties
assigned and instructions given by the President of QI or other QI officer as
authorized by QI's Board of Directors.
4. TERM OF SERVICES. The initial term of this agreement is for a two year
----------------
period commencing January 1, 1998, subject to the termination section of this
agreement, with the parties agreeing to confirm any subsequent extension of this
initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services for
-----------------
the initial term of this agreement shall be $125,000 an annual amount payable in
accordance with QI's payroll procedures and policies as implemented during the
term of this agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation proposed
-----------------------
by this section is subject to QI's receipt of further capital funds required to
finance the management compensation program. QI's Board of Directors will also
have to vote approval of these or any other specific additional compensation
packages proposed for payment or for vesting to Russell during the term of this
agreement. The proposed post funding compensation program allocated for Russell
will be comprised of the following elements:
-2-
<PAGE>
a) An annual Cash Bonus of $35,000
b) Further incentive stock options as specified and approved by the
Board of Directors by means of stock options at the rate of 25,000 shares
per year for significant performance with an additional stock option at the
rate of 12,500 shares per year for exceptional performance as defined and
determined by the Board of Directors.
7. EXTENT OF SERVICES. Russell shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing Russell from investing his assets in the future as a passive
investor in such form or manner as he sees fit as long as the investments will
not require any personal service from Russell. To that end, Russell herewith
discloses that he has a present ongoing investment of approximately 10% with an
engineering services company, a former employer. Russell agrees, in the future,
not to increase his investment in the engineering services company or to invest
in any entities that compete directly with QI or affiliated or related
companies.
8. TERMINATION. A. In the event QI terminates Russell's employment for
-----------
any reason other than Russell's gross malfeasance or gross nonfeasance, Russell
will continue to be paid his salary by QI for a period of six months after such
notice of termination is given or until Russell shall commence employment of a
comparable nature and salary with another entity, whichever shall first occur.
In this regard, it is understood and agreed that Russell shall use his best
efforts in attempting to locate such other employment and QI agrees to cooperate
in helping Russell in the pursuit of any such position and QI agrees to provide
the requisite references and if such employment is of a lesser salary than his
then current
-3-
<PAGE>
salary at QI, QI agrees to reimburse Russell for the difference between such
salaries for the six month period specified above. It is agreed that any stock
options awarded Russell will continue to vest and be exercisable during this six
month period.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of Russell.
C. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 10
days notice to Russell, if appropriate, in the event of the disability or death
of Russell which would otherwise prevent him from performing his or her duties.
For purposes of this provision, "disability" shall be defined in accordance with
the definition of "disability" as contained in QI's disability insurance policy.
In the event of Russell's death, any guaranteed monies due under this agreement
would be paid directly to QI's estate as probated.
9. NONDISCLOSURE. During the course of his employment with QI, Russell may
-------------
have occasion to conceive, create, develop, review, or receive information that
is considered by QI to be confidential or proprietary, including information
relating to inventions, patent, trademark and copyright applications,
improvements, know-how, specifications, drawings, cost and pricing date, process
flow diagrams, customer and supplier lists, bills, ideas, and/or any other
written material referring to same Confidential or Proprietary Information. Both
during the term of employment and thereafter:
-4-
<PAGE>
1. Russell, as an employee and as Director of Engineering,
agrees to maintain in strict confidence such Confidential Information.
2. Russell further agrees to use his best efforts to ensure that
all such Confidential Information is properly protected and kept from
unauthorized persons or disclosure.
3. If requested by QI, Russell agrees to promptly return to QI
all materials, writings, equipment, models, mechanisms, and the like
obtained from or through QI, including but not limited to, all
Confidential Information, all of which Russell recognizes is the sole
and exclusive property of QI.
4. Russell agrees that he will not, without first obtaining the
prior written permission of QI: (a) directly or indirectly utilize
such Confidential Information in his or her own business; (b)
manufacture and/or sell any product that is based in whole or in part
on such Confidential Information; or (c) disclose such Confidential
Information to any third party.
10. EMPLOYER PERQUISITES. Russell shall be entitled to and shall receive
--------------------
all employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a. Health insurance under terms and conditions as provided to
other employees of QI.
b. Vacation of 10 business days per annum.
c. Paid holidays pursuant to QI's stated policy.
11. REPRESENTATIONS AND WARRANTIES. Other than as disclosed in Section 7
------------------------------
with regard to the relationship with the engineering services company:
A. Russell represents and warrants to Company that he is not a party
to or otherwise bound by any other employment or services that may, in any way,
restrict his right or ability to enter into this agreement or otherwise be
employed by QI.
-5-
<PAGE>
B. Russell agrees that he will not reveal to QI, or otherwise utilize
in his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by the
-------------------------
State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state
or federal courts of Pennsylvania. The parties consent to the jurisdiction of
such courts, agree to accept service of process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
-------------------------------
and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed as a
------
waiver of any prior or subsequent default of the same or other provisions of
this agreement.
16. SEVERABILITY. If any provision hereof is held invalid or unenforceable
------------
by a court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision, and such invalid provision shall
be deemed to be severed from the agreement.
-6-
<PAGE>
17. ASSIGNABILITY This agreement and the rights and obligations thereunder
-------------
are personal with respect to Russell and may not be assigned by any action of
Russell or by operation of law. QI shall, however, have the right to assign this
agreement to a successor in interest to QI or to the purchaser of the assets of
QI but not to any other third party.
18. INTEGRATION. This agreement constitutes the entire understanding of
-----------
the parties, and revokes and supersedes all prior agreements between the parties
and is intended as a final expression of their agreement. It shall not be
modified or amended except in writing signed by the parties hereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and Russell confirm the foregoing accurately
sets forth the parties respective rights and obligations and agrees to be bound
by having the evidenced signature affixed thereto.
Quadrant International, Inc. Robert Russell
By: /s/ Francis Wilde /s/ Robert Russell
--------------------------- -----------------------
Francis Wilde, President Signature
Date: 1/12/98 Date: 1/12/98
------------------------- ------------------
-7-
<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 15th day of
December, 1997, and is by and between Quadrant International, Inc., a
Pennsylvania corporation with an office for purposes of this Agreement at 269
Great Valley Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and
Gregg Garnick with an address at 718 Cambridge Rd. Bala Cynwyd PA 19004
(hereinafter "Garnick").
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of Garnick to render services for
and on its behalf in accordance with the following terms, conditions and
provisions; and
(b) Garnick wishes to perform such services for and on behalf of QI,
in accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT. QI hereby employs Garnick and Garnick accepts such
----------
employment and shall perform his duties and the responsibilities provided for
herein in accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. Garnick shall at all times be QI's employee subject
-----------------
to the terms and conditions of this Agreement.
<PAGE>
3. TITLE AND DUTIES. QI agrees to employ Garnick and Garnick accepts such
----------------
employment as a full time employee and agrees as per the terms and conditions of
this agreement to serve as and with the title of Chief Financial Officer of QI
with the authority and responsibilities of that position, it being agreed that
Garnick will report directly to the Board of Directors and will perform
diligently, faithfully, and to the best of his ability all duties assigned and
instructions given as authorized by QI's Board of Directors.
4. TERM OF SERVICES. The initial term of this agreement is for a two-year
----------------
period commencing January 1, 1998, subject to the termination section of this
agreement, with the parties agreeing to confirm any subsequent extension of this
initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services for
-----------------
the initial term of this agreement shall be $125,000 an annual amount payable in
accordance with QI's payroll procedures and policies as implemented during the
term of this agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation proposed
-----------------------
by this section is subject to QI's receipt of further capital funds required to
finance the management compensation program. QI's Board of Directors will also
have to vote approval of these or any other specific additional compensation
packages proposed for payment or for vesting to Garnick during the term of this
agreement. The proposed post
-2-
<PAGE>
funding compensation program allocated for Garnick will be comprised of the
following elements:
a) An annual base salary of $125,000
b) An annual Cash Bonus of $35,000
c) Further incentive stock options as specified and approved by the
Board of Directors by means of stock options at the rate of 25,000 shares
per year for significant performance with an additional stock option at the
rate of 12,500 shares per year for exceptional performance as defined and
determined by the Board of Directors.
7. EXTENT OF SERVICES. - Garnick shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing Garnick from investing his assets as a passive investor in such
form or manner as he sees fit as long as the investments will not require any
personal service from Garnick. However, Garnick agrees not to invest in any
entities that compete directly with QI or affiliated or related companies.
Garnick shall have the further right to serve on other Boards of Directors
provided it is determined by the Board of Directors of QI that there is no
conflict of interest with such service and Garnick duties pursuant to the
employment agreement and such other Board services does not interfere with the
performance of the stated services for QI.
8. TERMINATION. A. In the event QI terminates Garnick's employment for
-----------
any reason other than Garnick's gross malfeasance or gross nonfeasance, or
otherwise materially breaches this Agreement (which breach is not cured within
10 days following written notice) Garnick will receive a lump sum payment equal
to his then current annual salary payable within 10 days after such notice of
-3-
<PAGE>
termination is given. It is agreed that any stock options awarded Garnick will
immediately vest in full in such event.
B. For purposes of this specific employment agreement, the parties
agree that any one of the following items shall be included as defining a
termination without cause:
1. Either QI moves its current headquarters more than 25 miles
form Malvern, Pennsylvania, or
2. Garnick is transferred to a location based more than 25
miles from Malvern, Pennsylvania, or
3. Garnick's position and responsibility as QI's Chairman or
Chief Executive Officer is adversely changed or modified during this
Agreement and Garnick upon 30 days written notice to the President or
Board of Directors setting forth the basis for Garnick's objection to
the changes is not satisfied in his sole discretion at the end of the
30 days period with the solution proposed to resolve the issue.
C. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of Garnick.
D. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 10
days notice to Garnick, if appropriate, in the event of the disability or death
of Garnick which would otherwise prevent him from performing his or her duties.
For purposes of this provision, "disability" shall be defined in accordance with
the definition of "disability" as contained in QI's disability insurance policy.
In the event of Garnick's death, any guaranteed monies due under this agreement
would be paid directly to QI's estate as probated.
-4-
<PAGE>
9. NONDISCLOSURE. During the course of his employment with QI, Garnick
-------------
may have occasion to conceive, create, develop, review, or receive information
that is considered by QI to be confidential or proprietary, including
information relating to inventions, patent, trademark and copyright
applications, improvements, know-how, specifications, drawings, cost and pricing
date, process flow diagrams, customer and supplier lists, bills, ideas, and/or
any other written material referring to same (Confidential Information). Both
during the term of employment and thereafter:
1. Garnick, as an officer and employee, agrees to maintain in
strict confidence such Confidential Information.
2. Garnick further agrees to use his best efforts to ensure
that all such Confidential Information is properly protested and kept
from unauthorized persons or disclosure.
3. If requested by QI, Garnick agrees to promptly return to QI
all materials, writings, equipment, models, mechanisms, and the like
obtained from or through QI, including but not limited to, all
Confidential Information, all of which Garnick recognizes is the sole
and exclusive property of QI.
4. Garnick agrees that he will not, without first obtaining the
prior written permission of QI: (a) directly or indirectly utilize
such Confidential Information in his or her own business; (b)
manufacture and/or sell any product that is based in whole or in part
on such Confidential Information; or (c) disclose such Confidential
Information to any third party.
10. EMPLOYER PERQUISITES. Garnick shall be entitled to and shall receive
--------------------
all employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a. Health insurance under terms and conditions as provided to
other employees of QI, except that, any case, QI shall continue to
bear 100% of the costs of such insurance.
-5-
<PAGE>
b. Vacation of 14 business days per annum.
c. Paid holidays pursuant to QI's stated policy.
d. A continued car allowance of $600 per month.
11. REPRESENTATIONS AND WARRANTIES. A. Garnick represents and warrants to
------------------------------
Company that he is not a party to or otherwise bound by any other employment or
services that may, in any way, restrict his right or ability to enter into this
agreement or otherwise be employed by QI.
B. Garnick agrees that he will not reveal to QI, or otherwise
utilize in his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by the
-------------------------
State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state
or federal courts of Pennsylvania. The parties consent to the jurisdiction of
such courts, agree to accept service of process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
-------------------------------
and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
-6-
<PAGE>
15. WAIVER. No waiver by either party of any default shall be deemed as a
------
waiver of any prior or subsequent default of the same or other provisions of
this agreement.
16. SEVERABILITY. If any provision hereof is held invalid or unenforceable
------------
by a court of competent jurisdiction, such invalidity shall not affect the
validity or operation of any other provision, and such invalid provision shall
be deemed to be severed from the agreement.
17. ASSIGNABILITY. This agreement and the rights and obligations
-------------
thereunder are personal with respect to Garnick and may not be assigned by any
action of Garnick or by operation of law. QI shall, however, have the right to
assign this agreement to a successor in interest to QI or to the purchaser of
the assets or stock of QI but not to any other third party.
18. INTEGRATION. This agreement constitutes the entire understanding of
-----------
the parties, and revokes and supersedes all prior agreements between the parties
and is intended as a final expression of their agreement. It shall not be
modified or amended except in writing signed by the parties hereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and Garnick confirm the foregoing accurately
sets forth the parties respective rights and obligations
-7-
<PAGE>
and agrees to be bound by having the evidenced signature affixed thereto.
Quadrant International, Inc. Gregg Garnick
By: /s/ Francis Wilde /s/ Gregg Garnick
------------------------ -----------------------
Francis Wilde, President Signature
Date: 2/2/98 Date: 2/2/98
---------------------- -----------------
-8-
<PAGE>
EXHIBIT 10.20
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
This Amendment (the "Amendment") is made as of the day of March 1998, by
and between Quadrant International, Inc., a Pennsylvania corporation, with an
office for purposes of this Amendment at 269 Great Valley Parkway, Malvern,
Pennsylvania 19355 (hereinafter, "QI"), and Gregg Garnick with an address at 718
Cambridge Road, Bala Cynwyd, Pennsylvania 19004 (hereinafter, "Garnick");
WITNESSETH
WHEREAS, QI and Garnick are parties to an Employment Agreement dated as of
Feb 2, 1998 (the "Employment Agreement"); and ,
WHEREAS, the parties desire to amend the Employment Agreement in accordance
with this Amendment in anticipation of a proposed equity financing of QI led by
Patricoff & Co. Ventures, Inc. in a minimum amount of $10,000,000 (the "Minimum
Closing") and a maximum amount of $18,000,000;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained, the parties intending to be legally bound hereby agree as
follows:
1. EMPLOYMENT STATUS FOLLOWING FINANCING.
-------------------------------------
Effective upon consummation of the Minimum Closing, Section 3 of the
Employment Agreement is hereby amended to reflect that Garnick shall continue to
be Chairman of the Board and an employee of QI, but shall cease to be Chief
Executive Officer of QI, which position shall be held by Frank Wilde In his
capacity as Chairman and an employee of QI, Garnick shall continue to be a full-
time employee of the Company and shall be actively involved in strategic
planning, mergers and acquisitions, financing activities and such other
activities as shall be directed by the Board of Directors and/or Frank Wilde
acting with the authority of the Board of Directors.
2. CHANGES TO TERMINATION.
----------------------
(a) Effective upon consummation of the Minimum Closing, Section 8 of
the Employment Agreement is hereby amended to reflect that, in addition to the
actions set forth therein that would result in the severance benefits set forth
therein becoming payable to Garnick, such severance benefits shall also become
immediately due and payable thirty (30) days following notice from Garnick to QI
that Garnick will voluntarily resign as an employee of QI effective at the
expiration of such 30-day period.
(b) Effective upon consummation of the Minimum Closing, Section 8 of
the Employment Agreement is also hereby amended to reflect that in the event
Garnick's employment is terminated by QI (other than for gross malfeasance or
gross nonfeasance) or voluntarily by Garnick, or in the event Garnick is removed
as Chairman of the Board (in each of which cases
<PAGE>
Garnick shall receive the severance benefits of Section 8), Garnick shall in any
event be entitled to continue to serve as a director on the Board of Directors
until such time as QI consummates an initial public offering of its Common
Stock, registered under the Securities Act of 1933, or QI is sold in a bona
fide transaction whether by merger, sale of stock, sale of assets or otherwise.
3. REDEMPTION.
----------
QI acknowledges its obligation to redeem 1,200,000 shares of Common
Stock of QI held by Garnick pursuant to the terms of the letter agreement dated
December 15, 1997 between QI and Garnick (the "Redemption") and affirms it will
effect such Redemption upon consummation of the Minimum Closing. The parties
acknowledge that, notwithstanding anything contained herein to the contrary, the
agreements of Mr. Garnick in paragraphs 1 and 2 above are subject to receipt by
Mr. Garnick of the proceeds of the Redemption.
4. MISCELLANEOUS.
-------------
(a) Except as modified hereby, the Employment Agreement shall remain
in full force and effect (including, without limitation, the provisions relating
to compensation and benefits); provided, however, that, to the extent any
-------- -------
provision of the Employment Agreement is inconsistent with the amendments
effected hereby, such provision shall be deemed amended to be consistent with
the intent of this Amendment.
(b) This Amendment shall be governed by the laws of Pennsylvania
without giving effect to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
QUADRANT INTERNATIONAL, INC.
By: /s/ Frank Wilde
-------------------------------
Frank Wilde
President 3/19/98
/s/ Gregg Garnick
-----------------------------------
Gregg Garnick 3/19/98
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF THE REGISTRANT
Jurisdiction of Incorporation
Subsidiary or Organization
---------- -----------------------------
1. Erste Cinco Vermogensverwaltungs GmbH Germany
2. Viona Vervatungs GmbH Germany
3*. Viona Development Hard & Software
Engineering GmbH Germany
* Viona Development Hard and Software Engineering GmbH is an indirect
wholly-owned subsidiary of Divicore.
<PAGE>
EXHIBIT 23.1
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position to
render the following report.
KPMG LLP
Consent of Independent Auditors
The Board of Directors Divicore Inc.:
The audits referred to in our report dated April 27, 1999 except as to the
last paragraph of Note 19, which is as of April __, 1999, included the
related consolidated financial statement schedule for each of the years in the
three year period ended December 31, 1998, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basis consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
Philadelphia, Pennsylvania
April 27, 1999
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors Divicore Inc.:
We consent to the use of our report dated April 6, 1999, with respect to
the balance sheet of Viona Development Hard & Software Engineering GmbH as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended, which report is included herein
and to the reference to our firm under the heading "Experts" in the prospectus.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,024 607
<SECURITIES> 0 0
<RECEIVABLES> 11,376 1,466
<ALLOWANCES> 265 467
<INVENTORY> 1,296 619
<CURRENT-ASSETS> 13,503 2,263
<PP&E> 1,377 286
<DEPRECIATION> 502 111
<TOTAL-ASSETS> 17,374 2,569
<CURRENT-LIABILITIES> 13,603 7,920
<BONDS> 0 0
14,589 0
0 0
<COMMON> 211 126
<OTHER-SE> (12,447) (6,210)
<TOTAL-LIABILITY-AND-EQUITY> 17,374 6,084
<SALES> 30,288 6,821
<TOTAL-REVENUES> 30,288 6,821
<CGS> 24,546 8,403
<TOTAL-COSTS> 24,546 8,403
<OTHER-EXPENSES> 18,585 5,506
<LOSS-PROVISION> 118 684
<INTEREST-EXPENSE> 722 197
<INCOME-PRETAX> (13,683) (7,253)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,683) (7,253)
<EPS-PRIMARY> (4.94) (3.52)
<EPS-DILUTED> (4.94) (3.52)
</TABLE>
